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 holdings in ETNs at the end of the reporting year were valued at NIS 68.9 billion, as compared with NIS 56.8 billion as of the end of 2011.
Investment advisors and portfolio managers – as of the end of 2012, there were 5,122 registered licensees in this field, 924 of whom were portfolio managers, 3,572 investment advisors, and 626 investment marketers.Furthermore, there were 173 licensed firms, of which 134 were investment portfolio management firms, 11 investment advice firms, and 28 investment marketing firms.
The value of assets under management by licensed portfolio managing firms as of the end of 2012 reached NIS 224 million, as compared with NIS 222 million managed by these companies as of the end of 2011.
Main Projects on the ISA's Agenda Exemptions Project
4 During the past year, as part of its "Roadmap" plan, the ISA published dozens of proposals for exemptions to be granted to all supervised entities, including the revoking of certain redundancies found in disclosure requirements, standardization of report categories and revoking of requirements that had overburdened supervised entities without carrying any real benefit to the investors. The exemptions were carefully chosen, giving careful consideration to the ISA's duty to protect the interests of the investing public. The following are some of the proposed exemptions: extending shelf prospectuses to three years (instead of two years under existing law); revoking the requirement to include quarterly financial statements in annual format in prospectuses; revoking redundancies in periodic reports; revoking the intention to require fund managers to prepare financial statements in accordance with IFRS; reducing and simplifying the procedure for clarifying clients' needs as required of investment consultants and portfolio managers, etc. In addition, the ISA proposed a number of exemptions which would only apply to small reporting corporations and small portfolio management firms. An example of this is the proposal to exempt small companies from the obligation to conduct lengthy and costly iSOX auditing of financial statements through accountants. The ISA intends to work towards the earliest possible implementation of the exemptions, for the benefit of the supervised entities, bearing in mind that the implementation of some of the exemptions will necessitate legislative amendments that subject the implementation process to the timetables of the Knesset and its committees. Regulation of Trading Platforms Over the past few years, a new sector of web-based Forex platforms has emerged both in Israel and abroad, enabling clients to trade in a variety of financial instruments (such as foreign currency derivatives and contracts, indexes, shares, commodities, etc). This field is currently unregulated and, as a result, the investing public is left exposed and unprotected. In order to provide investors with appropriate protection, the Israel Securities Authority has initiated legislative amendments which would enable it to regulate this field, establishing – over the past year – a special department which will supervise the trading platforms. The commencement of supervision is dependent upon the approval of a set of regulations, which as of this time is pending final approval by the Knesset Finance Committee, expected to take place during the coming year. Regulation of Rating Agencies Over the past few years, rating agencies have become significant players in the capital market. The ratings issued by them serve as a basis for investment decisions, both for private investors and institutional ones. This situation warrants regulation of the activity of rating agencies, as is the case in many countries worldwide and as a result of the lessons of the global credit crisis which erupted in 2008. Over the past year, the Ministers' Legislative Committee approved a bill to regulate the activity of rating agencies. The ISA intends to promote legislation on this issue in the coming year, in accordance with the principles currently in existence or under development in Europe and the United States, especially in view of the fact that the rating agencies operating in Israel form part of multinational groups. Regulation of General Investment Advice (Analysis) Under existing law, investment analysis or general investment advice (such as giving investment recommendations on radio or television) are included in the definition of "investment advice" in the Regulation of Investment Advice, Investment Marketing and
5 Investment Portfolio Management Law of 1995 (hereinafter – the Advice Law). However, in view of the fact that general investment advice is defined as advice directed towards a broad target audience – an open-ended group of clients the members of which are not known in advance – some of the statutory provisions (that are specially tailored for advice directed at a particular client, who is identified by the consultant) do not apply. For this reason, an amendment to the Advice Law was drafted, according to which those engaging in general investment advice (analysts) would be exempt from obtaining investment advice licenses and will be bound by other requirements. In addition, the ISA is promoting regulations which would lend substance to the framework provisions set forth in the draft amendment. Supervision of Independent Auditors (PCAOB) Due to failures found in the work of independent auditors and the inherently problematic mechanism by which they are compensated by auditees, developed countries around the world have established bodies which oversee the work of accountants auditing financial statements of publicly traded companies. The Israel Securities Authority attributes supreme importance to the establishment of a similar supervision body in Israel, which would be in charge of audits performed by accountants, including setting forth auditing standards as well as rules in the areas of quality control and independence, with ongoing improvement of the audit process. The establishment of such a body is, as aforesaid, a key prerequisite to the ongoing development of the local capital market and encouragement of foreign investments. During the year, the ISA published an exposure draft regarding the establishment of a supervisory body over independent auditors, and it intends to continue promoting legislation in this matter during the coming year. Regulation of ETNs – from a Reporting Regime to a Supervisory Regime Over the past two years the ISA has been promoting a new model of supervision over ETNs (Exchange Tracking Notes). The object of this model is to address the key risks embodied in the activity of ETN companies – operational risk, market risk, credit risk, and liquidity risk. The ISA intends to conclude the regulation of the model by way of legislation, determining disclosure requirements regarding the various risks embodied in the ongoing activity of ETNs. Regulation of Advice to Institutional Investors Under existing law, institutional entities managing the public's funds are required to participate in certain general meetings. In reality, many of these entities seek the help of consulting services (hereinafter – proxy advisors) prior to such meetings in order to decide how to vote, abiding by their recommendations as a default. Thus, the ISA intends to promote the regulation of advice to institutional investors during the coming year. The regulatory process shall take place on two levels: defining best practice principles for proxy advisors as well as indirect regulation, i.e. – determining conditions for the engagement of a proxy advisor by a fund manager in preparation for a general meeting. Regulating brokers and dealers Under existing law, the activities of brokers (i.e. – those performing transactions on behalf of another), dealers (i.e. – those performing transactions for others with the dealer's own account), and custodians (i.e. – those providing custody services to clients' assets) lack extensive, direct and comprehensive regulation. Regulation of these areas is indirect – it is subject to the provisions of the Supervision of Banks and Stock Exchange Members – but does not provide sufficient answer to all aspects of the activities of the abovementioned
6 financial intermediaries, and may cause regulatory differences depending on the identity of the regulating body.
In the coming year, the ISA intends to provide regulatory response to the existing situation by establishing a legislative framework which would apply to the activity of brokers, dealers, and custodians. Such regulation shall be made with the cooperation of the relevant regulatory bodies.
Underwriting Reform
In the past few years, most security offerings have been made without underwriters, whose role is – inter alia – to serve as gatekeepers. As a result, such offerings are conducted without an underwriters' commitment or control by an outside party which would be responsible for possible misleading details in prospectuses.
As a result, over the last year, the ISA published a draft outline containing a number of alternatives, the aim of which is to reinstate underwriting as a part of securities offerings, thus ensuring the presence gatekeepers who would serve as external auditors vouching for the quality of disclosure in prospectuses. In the coming year, the ISA intends to continue promoting the aforementioned changes in the area of underwriting.
Improving and Abridging Financial Statements In 2010 the Israel Securities Authority began a large scale project to improve reporting by corporations with the aim of increasing the relevancy and usefulness of disclosures for investment decisions made by the investing public. As part of this effort, the ISA has published a number of industry-specific disclosure provisions for the fields of oil and gas as well as investment property, and additional disclosure provisions are being considered for other industries and other chapters in periodic reports and prospectuses. In addition to the measures adopted so far for the purpose of improving reports, the ISA seeks to address the significant growth in the length of financial statements, which may hinder clarity and make it more difficult for users to understand the reports and make investment decisions based on them. As an initial step, the ISA issued a call to capital market players to propose ideas and possible solutions as to the manner in which financial statements can be abridged. In the wake of the responses received, last year the ISA published a legal staff bulletin, in which it presented an initial outline for abridging financial statements. As aforementioned, these are initial steps are expected to be accompanied by further measures as may be required in the future. In order for this initiative to succeed, it requires a concerted effort to be made by the ISA, reporting corporations, and by those taking part in the preparation or auditing of financial statements. Handling the Bond Crisis – Debt Settlement In 2012, 28 corporations opened negotiations with their debt holders in order to reach debt settlement agreements, as opposed to 34 such negotiations for agreements first initiated in 2011. Due to the massive scope of maturities expected in 2013 and 2014, it is estimated that the number of corporations negotiating for debt settlement agreements will remain high. The Israel Securities Authority invests considerable resources in handling the debt settlement agreement phenomenon, and has developed – throughout the years – a “regulatory toolbox” intended to improve the protection granted to investors in times of crisis, sending advance warning signals regarding companies' financial position, so as to assist investors in making investment decisions.
7 The ISA attributes considerable significance to the role of institutional investors in debt settlement agreements. Without active involvement on their part, to secure the rights of the plan holders the deposit holders, it is doubtful whether it will be possible to grant investors maximum protection in debt settlements. This being the case, the ISA encourages institutional investors to take a more active part in the development of debt settlement agreements. As part of its "regulatory toolbox" and its efforts to encourage active involvement by institutional investors, the ISA its taking a number of measures – on an ongoing basis – to protect the interests of bondholders. For example, as part of its ongoing handling of debt settlement agreements, the ISA staff examines, inter alia, disclosures provided by companies during settlement periods as well as prior to them, so as to ensure that investors have at their disposal all relevant information, including information not explicitly required by law, as long as such information is significant for reasonable investors. In certain cases, the ISA requires companies to provide extended disclosures of their financial positions, emphasizing any warning signals pertaining to their business activity as well as detailed explanations of their plans to repay their liabilities. In addition, the ISA is actively involved in proceedings being conducted in courts towards approval of debt settlement agreements, and – wherever necessary – expresses its position regarding the disclosures required prior to any decision regarding the future of the settlement and the manner in which interests are classified in various meetings. This is done so as to ensure that the settlement approval process is transparent and fair, even if, at the end of the day, the public is compelled to waive part of the debt due. Tests and Conditions for Dividend Distribution According to the Companies’ Law, a corporation may distribute dividends if two requirements are met. The first is based on the corporation's solvency and the second – on its retained earnings. Nevertheless, it should be noted that the Companies Law was enacted in 2000, in an accounting environment radically different than the one in existence today. Several years after the Companies’ Law was enacted, the International Financial Reporting Standards (IFRS) were adopted in Israel, causing a veritable accounting revolution. IFRS raise material questions which the Israeli legislators did not and could not have foreseen when enacting the Companies Law. One of the main questions is whether there is a connection between companies distributing dividends from revaluation profits, which are based on valuations, and the financial difficulties which some of these companies have encountered following such dividend distributions. Thus, it should be examined whether revaluation profits qualify as distributable profits. On the ISA's initiative, the Companies Law was amended during the past year, so as to prevent corporations from distributing dividends from accounting surpluses created following the early adoption of IFRS 9. Such a distribution shall only be allowed if there is no concern that it may harm the company's solvency, and pending the court's approval. In addition, the ISA has proposed to re-examine the distribution requirements contained in the Companies Law, and intends – in cooperation with the Ministry of Justice – to examine the possibility of amending those requirements so as to ensure that distributions are based on actual cash flow (as opposed to revaluation profits or other unrealized accounting profits). Promoting Investments in Publicly Traded Companies Engaged in Research & Development Publicly traded companies engaged in research and development drive the development of the capital market in particular and the Israeli economy in general. As a result, in September
8 2012, the Chairman of the ISA appointed an inter-ministerial committee that was charged with examining and recommending various means and measures which would create a supportive infrastructure for research and development companies, placing at their disposal a more accessible path for raising capital on the Stock Exchange without compromising the interests of the investing public or proper trading. The committee includes representatives from the Israel Securities Authority, the Stock Exchange, the Ministry of Justice, the Tax Authority, the National Economic Council, and the Capital Market Division, and is expected to finalize its recommendations no later than April 2013. Online Voting System The Israel Securities Authority attaches great importance to increasing involvement on the part of shareholders and bondholders from amongst the public. Such involvement can be expressed, inter alia, through participation in meetings and decision making processes which shareholders and bondholders may participate in. Currently, the percentage of participants in meetings from among the public is negligible, and it seems that the reason for this is the amount of time consumed by obtaining participation approvals and actual arrival at meetings. Thus, the Israel Securities Authority decided to encourage the involvement of the investing public by lowering the abovementioned bar, and began developing an innovative computerized system, which would enable holders of securities to participate in general meetings and vote remotely through the internet, using a simple, no-cost process. The technological development process is nearing its final stages, and the ISA is simultaneously promoting legislative amendments which will enable this system to be activated. Leveraged ETNs In the past few years, the leveraged ETN market tracking the TA 25 Index was controlled by a single issuer, due to the absence of a provision in the Stock Exchange Rules and Regulations enabling new offerings of leveraged ETNs. This created a situation of substantive inequality in the ETN market, and consequently, in recent months, the ISA sought a solution that would open the market to competition, without affecting proper trading on the Stock Exchange. Lately, the ISA developed – in coordination with ETN companies and the Stock Exchange – a model which will allow the entry of new players into the leveraged ETN market. In accordance with this model, changes were introduced into the Stock Exchange Rules and Regulations so as to allow new offerings of this instrument. Exchange Traded Funds (ETFs) As part of a legislative amendment intended to shift the field of ETNs from a reporting regime to a supervisory regime, the ISA is working on regulating a new financial instrument known as ETF (Exchange Traded Fund). An ETF is a tracking trust fund, whose units will be listed for trade on the Stock Exchange and will only be purchased during trading. The aim of regulating this field is to provide a legal basis for this new financial instrument, which is the Israeli equivalent of the ETFs popular outside Israel, and which will diversify the existing supply of financial products and allow fair competition between alternative products, thus rendering competition more effective. Foreign Funds The Israel Securities Authority attributes significance to the opening up of the Israeli capital market to foreign funds, in order to increase competition in the funds market and vary the investment possibilities available to the Israeli public. Nevertheless, the opening up of the
9 market to foreign funds must be subjected to conditions ensuring appropriate protection of the investing public. Amendment 15 of the Joint Investment Trust Law has been pending approval of the Knesset Finance Committee for some time. The Amendment concerns – inter alia – the possibility of offering units of foreign funds to the investing public in Israel. However, the Amendment was put on hold so as to enable the ISA to re-examine the conditions under which the Israeli market should be opened to foreign trust funds, in a manner which would ensure that the regulatory gap between local funds and foreign funds operating in Israel, if one exists, would not adversely affect investors' interests. This process was completed during the past year and, as a result, the ISA now recommends allowing foreign funds to operate in Israel in accordance with one of the following tracks: • Offering units of foreign funds in Israel – a foreign trust fund shall be entitled to directly offer units of the fund to the Israeli public, subject to compliance with the conditions stipulated in the law (such as management of assets on a significant scale by the fund manager; compliance with EU directives; deposit of a bank guarantee; financial deposit; appointment of a representative in Israel, etc.). • Exposure to foreign funds through investment advisors – this model is based on the assumption that reputable investment advice entities use a screening and selection process for products – based on criteria related to their quality – before offering them to the public. Under this model, the ISA is not involved in the screening process, nor does it stipulate conditions for the products being offered, or provide any other permit or "stamp of approval" of any kind, while the advising entity bears full responsibility for the products. This model should ensure that advisors recommend a foreign fund purely based on merit, rather than on their compensation. Reducing Distribution Fees The recommendations of the Bachar Committee yielded a compensation model for the distribution of trust funds, whereby fund managers pay fees to distributors, as opposed to the compensation model in the field of securities, where distributors are paid by investors. As a complementary measure, regulations were enacted to determine maximum distribution fees that distributors are allowed to collect from trust fund managers. In reality, distributors (most of whom are banks) collect the maximum distribution amount, a practice which – in effect – prevents the reduction of management fees in mutual funds. This situation prompted the ISA to initiate a process for reducing the maximum distribution fees, while creating a mechanism that would ensure that fund managers will, in turn, immediately reduce fees paid by investors. The reduction of distribution fees is also expected to facilitate the entry of foreign funds into Israel, as mentioned above, while equalizing the fees for distributing stock based funds and bond based funds is expected to reduce the potential for conflicts of interests inherent in investment advice in banks. The amendment of the regulations in this matter is expected to be presented to the Finance Committee for approval during the coming year (continuing the deliberations on the matter which began in 2012). Alternative Distribution System Currently, the distribution of the trust funds takes place primarily through banks. In order to improve market efficiency, increase competition and benefit investors, the Israel Securities Authority initiated a move to create an efficient and inexpensive alternative that competes with the trust fund distribution system currently in place. The system will be operated by a bank that is not retail orientated, which won a tender conducted by the Association of Fund Managers. The debiting and crediting of clients shall be done in members of the Stock Exchange client accounts.
10 Final legislative amendments required to activate the system were completed during the past year, and the ISA intends to do its best to expedite the activation of the system. Increasing Competition among Brokers The Israel Securities Authority attaches importance to promoting competition among brokers and to removing barriers which would enable non-bank members of the Stock Exchange to compete with banks on providing brokerage services to households ("retail" clients). The ISA has learnt from market players that the main barrier to such competition is the absence of branches for non-bank Stock Exchange members, which makes the latter investment houses relatively inaccessible to households. As a result, the ISA is taking measures to enable clients of these investment houses to open web-based securities accounts, which will compensate for the relative inaccessibility of households to the offices of investment houses. This will make it significantly easier for investment houses to enlist retail clients, creating a real alternative to broker services provided by banks. Enforcement and Deterrence in the Capital Market General The ISA is responsible for taking enforcement action in response to capital market offenses and violations, including imposing sanctions on violators and opening criminal investigations and administrative probes in cases where laws under the ISA’s purview are violated. As part of its roles, the ISA conducts complex and intricate investigations and collects information from various sources on an ongoing basis. The information is reviewed, analyzed, and evaluated by the ISA, using additional intelligence activities, as needed, in order to support, corroborate or refute information, under strict secrecy. For this purpose, the ISA uses, inter alia, sophisticated IT systems with algorithms capable of identifying irregular activities at the Security Exchange. Criminal Enforcement In 2012, the ISA identified and investigated a number of securities trading incidents in institutional entities' accounts, in which senior officers or employers allegedly engaged in fraudulent activity for personal gain. In addition, the ISA identified and investigated events in which individuals connected to controlling shareholders of publically traded companies engaged in activities suspected as securities frauds. During the reporting year, the ISA forwarded to the District Attorney’s office twelve cases after having investigated them. In addition, as part of the ISA's strategy of involvement in the globalization process, in 2012 the ISA continued to respond to foreign authorities’ requests to conduct judicial inquiries in accordance with treaties signed by the ISA. In addition, the ISA continued to cooperate with other enforcement agencies as well as with Israeli enforcement authorities as part of their joint efforts to defeat economic criminal activity. In 2012, the Securities Department at the Tel Aviv District Attorney's Office (Taxation and Economics) filed three indictments based on investigation cases forwarded by the ISA, on charges of including misleading information in a prospectus and fraudulently influencing securities prices.1 Administrative Enforcement
1 During the first three months of 2013, an additional indictment was filed with the court on insider information charges.
11 In 2012, the ISA implemented, for the first time, administrative enforcement measures for violations and offenses in the capital market, as practiced by regulators in most developed countries. This means of enforcement (which was added to financial sanctions, a measure which has been at the ISA's disposal for the past few years) is intended to provide a solution to under-enforcement in the capital market, which is partly the result of the length of the proceedings, occasionally taking many years to unfold in the courts. During the year, the ISA published criteria for deciding whether to try a case on a criminal or administrative level. In 2012, since administrative enforcement was first introduced, 11 administrative inquiries were completed, seven of which were filed with the Administrative Enforcement Committee as of the end of the year: in four cases administrative claims were filed concerning various violations, and in three cases, an application for approval of an enforcement settlement was filed, accompanied by an enforcement settlement. One case was closed and the remaining cases are still pending.2 The experience gained during the first year of implementing the administrative enforcement track demonstrates the efficiency of the procedure in terms of the time, in comparison to criminal proceedings. In cases under the administrative track, a decision was reached within a matter of months from the time that the administrative claim was filed with the Committee, as opposed to a number of years until a decision is reached by the courts in a criminal enforcement case. During the first year of its activity, the Administrative Enforcement Committee decided on two enforcement settlements and handled two administrative cases in full. The International Arena The Israeli capital market legislation has been recognized by the international community as one of the best and most advanced in the world in terms of protecting investors. This year we received evidence of this view in a comprehensive evaluation of Israeli financial markets conducted by the International Monetary Fund (IMF), in which Israel was rated one of the leading countries in terms of quality regulation of the capital market. The ISA received similar recognition by the OECD, which examined the quality of corporate governance in Israel in comparison to other countries. During the year, the ISA took a number of measures aimed at enhancing the position of the Israeli capital market internationally as an efficient and advanced market, with up-to-date regulation. These measures include, inter alia: signing international agreements with leading authorities worldwide recognizing Israeli regulation and activity in international economic forums such as the IOSCO (International Organization of Securities Commissions) and the OECD, regarding regulation and supervision of capital markets, in terms of cooperation on enforcement and information exchange and in order to increase harmonization of Israeli securities laws with similar laws in other developed countries. In addition, as part of the ISA's aspiration to be at the spearhead of local and international securities regulation, it became – during the past year – a full member of the IOSCO's ERC (European Regional Committee). This target was achieved after many years of unsuccessful attempts to join the Committee. The ISA regards the integration of the Israeli capital market into the globalization process as a necessary condition for creating a competitive Israeli capital market, so as to promote and develop the market as an essential component of economic growth. International recognition in general, and bi-lateral recognition by foreign authorities in particular, can
2 During the first three months of 2013, one administrative claim was filed with the Administrative Enforcement Committee for violation of the Securities Law.
12 assist in making the Israeli market more accessible to foreign companies and can assist Israeli companies in raising capital in foreign markets. Systemic Risk The economic crisis which erupted in 2008 and the atmosphere of instability that has prevailed in the markets ever since, have placed the issue of systemic risks at the top of regulators' agendas around the world. The joint goal is to minimize the likelihood that domino-effect events will occur, such as failure of a company or a failure in the financial system capable of causing serious damage to additional companies or markets, thereby causing systemic damage with grave adverse consequences for the real economy. Research conducted following the crisis shows that regulatory authorities and the capital market itself need to deal with systemic risks in a more direct and structured manner, rather than leave it to the banking system, as was the traditional approach in the past. Systemic risks have various interfaces with the capital market: risks which originate directly in the capital market (such as a defective market infrastructure, problematic market innovation, price distortions, and inappropriate conduct by key players); the role of the capital market in the transfer and amplification of shocks to the financial system, creating systemic risks (such as counterparty risks in OTC markets, financing and liquidity crises); the manner in which the capital market is influenced by risks that originate outside the market (such as macro-financial risks, security risks, etc). Israel and other countries around the world are realizing that capital market regulators must create special tools for identifying, monitoring, and managing factors which may increase systemic risk or the system's vulnerability to these factors, within the areas under their purview. It is also evident that handling systemic risks requires close cooperation between authorities and institutions – both locally and globally. The ISA attaches great importance to addressing systemic risks in a timely manner, and supports the establishment of a team of regulators that will be charged with financial stability (FSC), in accordance with the recommendations of the report published by the International Monetary Fund in relation to Israel.
Financial Education The Securities Law defines the role of the ISA as "protecting the interests of the investing public”. Thus, the ISA regulates the areas under its purview and supervises them, taking measures to reinforce the public's trust in the fairness of the Israeli capital market. As a result, the ISA has defined financial education as a complementary objective to its strategy of protecting the interests of the investing public. In order to achieve this goal, the ISA initiated, inter alia, a website dedicated to financial education for the public (www.kesef.org.il), which contains information about the capital market, popular investment channels, a glossary of terms, etc. The ISA intends to expand its activities in the area of financial education, inter alia, by using the media in order to reach as many people as possible. Over the past year, the ISA, together with the Voice of Israel's Reshet Bet (a public radio channel), established a weekly talk show (every Thursday), where the ISA's senior officers are interviewed on current affairs related to financial education and the capital market. In summary, The Israel Securities Authority is currently facing significant challenges in its efforts to protect of the investing public. The implementation of the various aspects of the Roadmap initiated by the ISA is critical to the positioning of Israel as one of the leading capital markets in the world in terms of regulation and protection of investors. The
13 expectation is that following the implementation of the plan, the coming years will witness a capital market that is more stable, better developed, and more reliable, thus enabling us to increase its attractiveness both for local investors and foreign investors and in the eyes of companies and entrepreneurs.
Respectfully,
Prof. Shmuel Hauser
14 TABLE OF CONTENTS
I Functions of the Israel Securities Authority II The ISA and its Employees III ISA Departments IV Corporate Finance Department A. General B. Supervision 1. Public reporting – data and highlights 2. Reports filed with the ISA and requests for exemptions / extensions 3. Audits and outsourcing in the Corporate Finance Department 4. Underwriter registry 5. Dual listing C. Regulation – Staff Legal Bulletins and special projects in 2012 1. Staff and Plenum legal bulletins and FAQs 2. Pre-rulings 3. Accounting and auditing enforcement decisions 4. Special projects in 2012 begun in previous years 5. Special Projects begun in 2012 V Investment Department 1. Mutual Funds a. General b. Permits to hold means of control in fund managers and licensing of fund managers and trustees c. Prospectuses d. Regulations e. Participation of mutual fund managers in general meetings f. Onsite audits of mutual fund managers g. Supervision of mutual fund trustees h. Regulation activities i. Enforcement measures concerning fund managers 2. Exchange Traded Notes (ETNs) a. General
15 b. Prospectuses c. Reports d. Regulation activities e. New legislation initiatives regarding ETNs f. Increasing ongoing disclosure g. Audits of ETN managers h. ETN trading i. The Exemption Proposal Project under the ISA's Roadmap plan 3. Investment advisors, investment marketing agents and investment portfolio managers a. General b. Licensing c. Supervision d. Regulatory activities e. Enforcement activities concerning license holders f. Legislation activity involving the Department g. Enforcement measures concerning fund managers h. Enforcement activities concerning license holders 4. Legislation activity involving the Department a. Regulations published during the year b. Legislative proposals (primary and secondary) 5. Judicial proceedings involving the ISA VI Research, Development and Economic and Strategic Counseling Department 1. Development 2. Economic counseling 3. Strategic counseling 4. Managing systemic risks 5. Compensation of senior officers 6. Regulatory impact analysis 7. Voting by institutionals and ties between business groups 8. Economic research 9. Examples for assessing ongoing analyses from 2012 VII Investigations, Intelligence and Trading Control Department VIII Department for Supervision over the Stock Exchange and Trading Platforms 1. Supervision over the Stock Exchange
16 2. Trading platforms 3. Brokers and dealers IX Legal Counsel 1. Legal Counsel – Responsibilities a. Legal counsel concerning the ISA’s operations and supervisory powers b. Organizational legal counsel 2. Key Activities in 2012 a. The ISA’s goals and strategy roadmap for the coming years and regulatory review b. Administrative enforcement and monetary sanctions c. Increasing legal certainty d. Key legislative initiatives e. ISA emergency readiness 3. Coordinating and Supporting Civil Suits a. Civil suits to which the ISA was party in the past year and/or which are still pending decision in court b. Actions concerning civil fines and monetary sanctions under the Joint Investments Law, the Advice Law, the Prohibition of Money Laundering Law, and the Securities Law c. Class actions and derivative actions involving the ISA or in which the ISA submitted its position d. Civil Actions against the ISA 4. Funding of Class and Derivative Actions and Removal of Barriers to Private Enforcement a. Funding of class and derivative actions b. Private Enforcement c. Class actions and derivative actions handled in the reporting year 5. Tenders and Contracts 6. Public Inquiries 7. Report by the Freedom of Information Officer X Legislation Department 1. General 2. Special projects in 2012 1. Reducing distribution commission and transaction fees 2. Credit rating agencies 3. Trading floors – finalizing regulation
17 4. Developing legal infrastructure for an online voting system 5. Public Company Accounting Oversight Board (PCAOB) 6. Trustees for debt certificate holders 7. Regulation of the Exchange–Traded Notes (ETNs) and Exchanged–Traded Funds (ETFs) 8. Changes in the field of administrative and civil enforcement 9. Procedure for initiation of regulation by the ISA 3. Primary legislation and secondary legislation published in the reporting year 1. Primary legislation 2. Secondary legislation 4. Proposed Primary and Secondary Legislation 1. Bills 2. Proposed Secondary Legislation 5. Private and government bills pertaining to ISA operations 6. Directives XI International Affairs Department 1. General 2. Participation in international forums a. Activity under the IOSCO b. Activity in the OECD 3. Cooperation on information exchange 4. Bi-lateral recognition 5. Study delegations 6. Strengthening ties with foreign authorities and other entities 7. International Monetary Fund (IMF) 8. Activity as part of the Committee for Implementing the Prohibition on Investing in Corporations Dealing with Iran Law XII Information Technology Department 1. Electronic Reporting – MAGNA 2. Document archiving and automated office 3. Operational system 4. The ISA website 5. Central Information System (CIS) – AMIGO 6. Computing for the Head of the Investigations, Intelligence and Trading Control Department 7. Forms and payments system
18 8. Knowledge management – search tools 9. Knowledge management – organizational portal 10. Human Resources system 11. Integrated Voting System 12. Infrastructure: servers, communications, and information security 13. ERP for accounting 14. Building a new computer room in Jerusalem XIII Administrative Enforcement 1. General 2. Administrative enforcement proceedings 3. Enforcement arrangements XIV Criminal Enforcement Department 1. Criminal indictments 2. Criminal cases pending in court 3. Criminal verdicts in trial court 4. Verdicts in criminal appeals
APPENDICES 2012 Budget Implementation Report Approved Budget for 2013
TABLES Table 1: No. of applications for permits to publish prospectuses vs. permits granted in the past three years Table 2: Issues and offerings by way of shares, convertible securities and bonds in the past three years Table 3: Shelf prospectuses in the past three years Table 4: Initiated review of financial statements during the past three years Table 5: No. of transactions with controlling shareholders during the past three years Table 6: Private offerings (substantial and exceptional) during the past three years Table 7: Purchase offers in the past three years Table 8: Companies which ended their reporting requirements in the past three years Table 9: Exemption applications filed in the past three years Table 10: Extension applications filed in the past four years
19 Table 11: Underwriter registry in the past three years Table 12: Requests for pre-rulings in the past three years Table 13: Financial sanctions imposed during the past two years Table 14: No. of mutual funds and value of assets under their management in the past three years Table 15: Statistics on mutual funds, by class, for 2012 Table 16: Participation rate of fund managers in general meetings in which they are required by law to participate and vote, in the past five years Table 17: Violations for which fines were imposed in 2012 and fine amounts Table 18: Total no. of licenses granted to individuals – portfolio managers, investment advisors and investment marketing agents in the past five years Table 19: No. of license applicants added each year in the past five years Table 20: Exam success rates in 2012 Table 21: Violations for which fines were imposed and fine amounts imposed on licensees in 2012 Table 22: Violations for which financial sanctions were imposed in 2012 and fine amounts Table 23: Distribution of investigation files forwarded to the Investigations Department in the past five years, by type of violation Table 24: Cases where it was decided whether or not there was sufficient prima facie evidence that an offense had been committed, in the past five years Table 25: Distribution of investigation cases forwarded to the District Attorney's Office in the past five years, by main type of violation type of violation Table 26: Administrative probes transferred to the Investigations and Intelligence Department, by type of violation, in the past two years Table 27: Distribution of administrative probes forwarded to the ISA Chairman this year, by main type of violation Table 28: Numerical data on primary legislation in the last four years Table 29: Numerical data on secondary legislation in the last four years Table 30: MAGNA activity data for 2012 Table 31: Administrative cases opened in 2012 Table 32: Distribution of investigation cases forwarded to the District Attorney's Office in the past five years, by main type of violation Table 33: Distribution of indictments in 2012, according to type of offense Table 34: Cases at the District Attorney's office as of the end of 2012 pending decision whether to prosecute, by year forwarded Table 35: Cases at the District Attorney's office as of the end of 2012 pending decision whether to prosecute, by type of violation
20 CHARTS Chart 1: Asset value in the past two years as a percentage of total funds, by funds' class Chart 2: No. of trust funds in the past five years Chart 3: Asset value of trust funds in the past five years (in NIS billions) Chart 4: No. of ETN Series in the past five years Chart 5: Value of public holdings of ETNs in the past five years Chart 6: No. of reports filed by ETN managers in the past five years Chart 7: Total value of assets under management by portfolio management companies in the past five years3 (in NIS billions) Chart 8: Value of managed assets for institutional and private investors for portfolio management companies as of December 31, 2012 Chart 9: No. of licensing examinees (by no. of exam units) in the past five years Chart 10: Processing of exemption applications in the past five years Chart 11: Processing of internship applications in the past five years
21 I Functions of the Israel Securities Authority
The Israel Securities Authority (ISA) was established under the Securities Law of 1968 (hereinafter – the Securities Law), and its function, as stated in the Law, is to protect the interests of the investing public. Within the framework of its mandate, the ISA handles, inter alia, the following issues:
1. Granting permits to publish prospectuses in which companies offer securities to the public, and prospectuses in which mutual funds offer units to the public;
2. Reviewing the following reports filed by reporting entities:
a. Immediate current reports, quarterly and annual financial statements;
b. Reports regarding transactions between companies and their controlling shareholders;
c. Reports on private offerings by companies;
d. Purchase offer specifications;
e. Mutual funds' current reports;
3. Regulating and supervising the activities of the mutual fund sector;
4. Licensing portfolio managers, investment advisors and investment marketers, regulating their activity and supervising them;
5. Ensuring compliance of portfolio managers and non-banking members of the Tel Aviv Stock Exchange (hereinafter – the Stock Exchange) with the Prohibition of Money Laundering Law of 2000.
6. Supervising the proper and fair activity of the Stock Exchange;
7. Conducting investigations regarding violations under the Securities Law, the Joint Investment Trust Law of 1994 (hereinafter – the Joint Investment Law), the Regulation of Investment Advice and Investment Portfolio Management Law of 1995 (hereinafter – the Investment Advice Law) and violations of other laws where related to violations of the aforesaid laws;
8. Conducting administrative enforcement procedures, including administrative inquiries regarding alleged administrative violations under the Securities Law, the Joint Investment Law, and the Investment Advice Law, as well as initiating administrative procedures with the Enforcement Committee, as per a decision by the Chairman of the ISA.
9. The ISA collaborates with the Institute of Certified Public Accountants in Israel in financing and operating the Israel Accounting Standards Board.
In accordance with the Securities Law, the Chairman of the ISA and its members are appointed by the Minister of Finance. Some of the members are appointed from among the public while others are civil servants; and one of them is an employee of the Bank of Israel. The ISA employs accountants, lawyers, economists and administrative employees.
22 II The ISA and its Employees
As of the end of December 2012, the members of the ISA plenum were as follows – . Prof. Shmuel Hauser, . Mr. Eldar Duchan, Adv.; . Prof. Shai Pilpel; Chairman . Mr. Yaheli Cahanov, Adv.; . Mr. Eyal Epstein; . Ms. Pnina Guy, Adv.; . Mr. Haj Ihie Hani, CPA; . Dr. Orly Sade; . Mr. Mickey Schneider, Adv.;
. Dr. Keren Bar Hava, CPA; . Mr. Barry Topf;
The ISA Plenum usually meets once a month. In addition, the Plenum operates through committees, which are charged with the following: granting permits to publish prospectuses; granting exemptions and extensions; stock exchange issues; issues relating to the ISA’s finances and budget; independence of auditors in companies subject to the Securities Law; issues relating to the licensing of investment advisors, investment marketers, and investment portfolio managers; issues relating to the imposition of civil fines on mutual fund managers, as well as other issues, as needed.
In 2012, the ISA Plenum held 11 meetings the Disclosure and Reporting Committee held 45 meetings the Secondary Market Committee held four meetings the Fines and Financial Sanctions Committee held nine meetings on the following issues: four meetings regarding class actions, four meetings regarding civil fines under the Investment Advice Law, and one meeting regarding the imposition of civil fines under Section 114 of the Joint Investment Law and four meetings regarding the imposition of fines under the Securities Law the Supervision and Regulation Committee held nine meetings regarding the granting of licenses and permits under the Joint Investment Law and the Investment Advice Law the Finance Committee held six meetings the Audit Committee held two meetings and the Tender Committee held 26 meetings.4
As of the end of December 2012, the members of the ISA plenum were as follows –
Mr. Amir Wasserman, Adv. – Chief Legal Counsel; Mr. Moti Yamin, Adv. – Senior advisor to the Chairman; Ms. Oranit Kravitz, Adv. 5 – Head of the International Affairs Department; Mr. Eli Levy, Adv.6 – Head of the Investigations, Intelligence and Trading
4 Until August 30, 2012, the date on which the Amendment to the Mandatory Tenders Regulations of 1993 went into effect, which determined that, effective immediately, ISA Plenum members may no longer serve as members of the ISA's Tender Committee. 5 On March 18, Adv. Oranit Kravitz was appointed Head of the International Affairs Department, in lieu of Adv. Yael Almog. 6 On September 1, 2012, Adv. Eli Levy was appointed Head of the Investigations, Intelligence and Trading Control Department, in lieu of Adv. Nir Bar On. In addition, on that date, the Supervision over the Secondary Market Department was incorporated into the Investigations and Intelligence Department.
23 Control Department; Dr. Ilana Modai, Adv. – Head of Administrative Enforcement; Mr. Oded Shpirer, Adv. – Secretary General; Ms. Orli Doron, Adv. – Head of the Securities Department at the Tel Aviv District Attorney's Office (Taxation and Economics); Dr. Gitit Gur–Gershgoren – Head of the Research, Development, Economic and Strategic Counseling Department; Mr. Natan Hershkovitz – Head of the Information Technology Department; Ms. Shirel Guttman–Amira, Adv. – Head of the Corporate Finance Department; Mr. Dudu Lavi – Head of the Investment Department; Ms. Sharona Mazalian Levi – ISA Spokesperson; Mr. Itzik Shurki, CPA7 – Head of the Supervision over the Secondary Market and Trading Platforms Department; Ms. Daniele Rimon, Adv.. – Head of the Legislation Department.
7 On September 1, 2012, Mr. Itzik Shurki, CPA, was appointed Head of the Supervision over the Secondary Market and Trading Platforms Department.
24 As of the end of December 2012, a total of 238 positions were staffed at the ISA, as follows:
Chairman’s Office – 4 positions; Legal Counsel – 6 positions; Legislation Department – 5 positions; International Affairs Department – 4 positions; Corporate Finance Department – 48.75 positions; Investment Department – 40 positions; Securities Department at the Tel Aviv District Attorney's – 14 positions; Office Administrative Enforcement Department – 6 positions; Investigations, Intelligence and Trading Control Department – 41.63 positions; Research, Development and – Dr. Gitit Gur–Gershgoren – 7 positions; Economic and Strategic Counseling Department Information Technology Department – 7 positions; Supervision over the Secondary Market and Trading – 6 positions; Platforms Department Administration, Finance and Human Resources – 18.67 positions; Interns – 17 positions; Students – 13 positions;
The approved manpower quota as of the end of December 2012 stood at 246 positions.
The portion of men and women at the ISA, as of December 2012, is equal.
The percentage of university graduates at the ISA is approximately 90% of the employees, most of whom are lawyers, CPAs and/or economists.
The budget of the ISA is funded by annual fees payable by companies that are subject to the Securities Law and the Joint Investment Law; by fees payable for applications to receive permits to publish prospectuses and private offerings; by licensing fees payable by investment advisors and investment portfolio managers, and by fees payable by the Tel Aviv Stock Exchange. The ISA budget is approved by the Minister of Finance and the Knesset Finance Committee.
25 III ISA Departments The Israel Securities Authority (ISA) was established under the Securities Law and its function, as stated in the Law, is to protect the interests of the investing public.
For more information regarding the ISA’s various areas of responsibility, please visit our website: www.isa.gov.il.
Corporate Finance Department
The staff of the Corporate Finance Department, which includes accountants and attorneys, is responsible for real time monitoring of current reports as well as interim and periodic reports filed by reporting entities. This includes reviewing and assessing reports with an emphasis on: disclosure levels; compliance with the provisions of the Securities Law and Regulations; enforcing Generally Accepted Accounting Principles (GAAP); and assessing the legal, accounting, and economic aspects involved therein. The Department staff is in charge of handling complex, often interrelated, legal and accounting issues and with identifying market failures that require the ISA’s intervention. Special emphasis is placed, in cooperation with the Investigations, Intelligence and Trading Control Department, on preventive activity based on intelligence.
Investment Department
The Investment Department is in charge of licensing, supervision, and regulation of various kinds of investment intermediaries, which include: mutual fund managers; mutual fund trustees; managers of Exchange Traded Notes (hereinafter – ETNs); ETN trustees; investment portfolio managers; investment advisors and investment marketers. The Department includes, inter alia, legal counsel and five divisions, as follows:
1. Licensing Division; 2. Supervision of Mutual Funds Division; 3. Supervision of License Holders Division;; 4. Financial Instruments Division; 5. Audit Division.
Research, Development and Economic and Strategic Counseling Department
The role of the Research, Development and Economic and Strategic Counseling Department (hereinafter – the Economic Department) is to extend economic and strategic counseling to the Chairman of the ISA and its various departments on economy related issues.
The Department develops and maintains computerized databases and indices for the ISA's use, for the purpose of ongoing follow up and assessment of the ramifications of decisions and specific events. In addition, the Department is charged with developing other decision support systems.
Beyond its ongoing activity, the Department is focused on: creating and developing the ISA's economic information infrastructure as a decision support tool; taking part in inter ministerial and international teams, whose purpose is to identify, monitor and minimize systemic risks; planning regulation in order to determine the need and implications thereof; conducting economic research on issues impacting Israel's capital market policies, as well as issues linked to the ISA's functions and purposes.
26 Investigations, Intelligence and Trading Control Department
The Head of the Investigations, Intelligence and Trading Control Department is in charge of identifying and exposing criminal activity in the capital market, in order to take enforcement measures, mainly by initiating investigation procedures to examine suspicions for prima facie criminal offenses in the capital market and administrative inquiry procedures in order to examine suspicions for prima facie administrative offenses. In addition, the Department is in charge of ensuring fair and orderly trade on the Stock Exchange.
The Department is authorized to conduct complex and intricate investigations both in Israel and abroad, which are concerned, inter alia, with securities fraud; the use of inside information; reports meant to mislead the investing public; controlling shareholder transactions; offenses of fraud and breach of trust in corporations; as well as money laundering offenses.
In addition, the Department is in charge of trading control: it conducts supervision activities and assessments with the aim of detecting trading irregularities, thus providing qualitative and quantitative information which supports the ISA's decision making processes on trading issues.
The Department includes staff with investigative background – mainly lawyers and accountants by profession – as well as trading professionals, who are mostly economists with securities trading experience.
Supervision over the Secondary Market and Trading Platforms Department
The Supervision over the Secondary Market and Trading Platforms Department is charged with exercising the ISA's supervision and control roles over fair and orderly trading at the Tel Aviv Stock Exchange. The Department's authority stems from the provisions of the Securities Law, especially Chapter H of the Law, which deals with the ISA's authority to determine the Stock Exchange's rules and regulations and its supervisory duty, as aforementioned, in regards to the Security Exchange's orderly and fair management.
In addition, the Department ensures the supervision over the Exchange's clearinghouse, as defined under Section 50a of the Law, in order to ensure its stability and efficacy. For this purpose, the Department ensures that the clearinghouse meets its payment liabilities as well as other international requirements. Moreover, the Department is currently preparing for its new supervisory role over trading platforms, which will begin as soon as the relevant amendment to the Law goes into effect.
Legal Counsel Department
The ISA's Legal Counsel Department is charged with all legal facets of the ISA’s activity and is headed by the Chief Legal Counsel. The Department’s main role is to provide legal counsel regarding the ISA's various supervisory powers to the ISA Plenum, its committees, the Chairman of the ISA, as well as to provide ongoing legal support to the ISA's various professional departments while supervising their activities. The Department is engaged, inter alia, with policy issues and horizontal decision making on specific, significant issues (such as: legislation initiatives, legal interpretation of law provisions); decision making on specific issues of special significance (such as decisions regarding enforcement on supervised entities); driving forward key projects which are at the top of the ISA's agenda, interfacing with other entities (other regulators, the State Comptroller, etc.); and, as necessary, legal
27 proceedings in which the ISA is a party or involved in (criminal and civil proceedings, including class actions and/or derivative actions, administrative proceedings, etc.).
In addition, Legal Counsel provides professional training to the ISA's legal staff and participates in various professional forums outside the ISA. The Department also provides legal counsel to the ISA as an organization, as is the case with any company or public sector entity, with emphasis on the specific characteristics of the ISA's structure, powers and position. In this capacity, the Department is involved in various matters regarding general legal issues, such as tender and labor laws, etc.
Legislation Department
The Department is responsible for supervision and regulation of various capital market areas, which include numerous players, such as publicly traded companies, investment advisors, investment portfolio managers, trust funds, underwriters and the Exchange. The Department's role is to address the numerous and varied legislative needs under the ISA's purview.
As such, the Department is responsible for leading and driving forward regulation which is relevant to the ISA as a whole or to several departments (such as regulation regarding the ISA's powers – including investigative, supervisory, enforcement and administrative regulation powers; regulation involving the development of administrative enforcement in the capital market, etc.).
In addition, the Department is charged with drafting all legislative proposals (laws and regulations) led by the ISA. As such, the Department cooperates, on an ongoing basis, with the ISA's various departments, each according to the areas for which it is responsible, with the aim or making the capital market more efficient and ensure its proper functioning.
The Department is also responsible for driving forward legislative amendments, until they become binding provisions. In this capacity, the Department cooperates with government ministries, the Knesset and other entities involved in legislation, on an ongoing basis. In addition, The Department maintains an ongoing dialog with various supervised entities, as well as with the investing public, at various stages of the legislation process.
International Affairs Department
The Department was established in order to implement the ISA’s strategy to integrate the Israeli financial market into the globalization processes in general, and – in particular – to integrate the ISA into cooperation processes which are forming between supervision and enforcement bodies worldwide.
The Department handles all international facets of the ISA’s work. It serves as a liaison with foreign supervisory bodies and securities authorities, including signing memoranda of understanding for cooperation with those authorities.
Secretary General
The Secretary General of the ISA is responsible for its ongoing operations, for follow up on implementation of policies set forth by the Chairman in the ISA’s various areas of activity, as well as for integration and coordination between the various departments.
The Chairman of the ISA heads the accounting and human resource functions. He is responsible for the following key issues, as follows: managing the ISA’s accounting and
28 comptroller units, including financial reporting for the ISA, accounting, fee collection, preparing the annual budget proposal, handling the budget approval procedures with the Ministry of Finance and the Knesset Finance Committee and overseeing the implementation of the budget; managing the ISA’s human resource function, including manpower quota and recruitment; salaries; employment agreements and terms; career development for employees; professional training; and employees’ welfare issues; managing of the procurement unit as well as professional and operational engagements and managing the ISA’s tenders; managing material resources (construction, maintenance, vehicles), as well as the area of security and safety.
Information Technology Department
The roles of the Department include development and maintenance of the ISA’s data systems and computing and communications infrastructures, so as to enable the ISA’s management and staff to perform their duties according to the approved annual work plans. The Department takes part in setting forth the ISA’s computing strategy and implements it.
The Department is responsible for developing and maintaining the following IT systems: the computerized archive system; electronic mail; task appointment, calendars and contact management; the ISA website; the investigations management system (AGATHA), used by the enforcement departments; the electronic reporting system (MAGNA), used by all reporting entities, the general public and the ISA staff; the operational system, which includes most of the information on various subjects handled by the ISA; ERP system used by the comptroller unit; BI (Business Intelligence) system for supervising trading; knowledge management systems, and additional dedicated systems.
The Department includes seven employees and some of its activities are carried out through outsourcing.
Administrative Enforcement Department
The Administrative Enforcement Department was established in 2011 for the purpose of implementing the new administrative procedures system established by the Streamlining ISA Enforcement Procedures Law (Amendment) of 2011. The Department represents the position of the ISA’s Chairman to the Administrative Enforcement Committee, whose role is to discuss, and decide in, administrative proceedings filed against those suspected of committing administrative violations of the Securities Law. The Department manages and accompanies the administrative procedures throughout, from the moment it receives the findings of an administrative inquiry or a criminal investigation converted into an administrative proceeding, develops the findings into an administrative claim, which serves as the basis for the administrative proceeding, in which it serves as an administrative prosecutor in front of the administrative committee, until the proceeding is exhausted.
In addition, the Administrative Enforcement Department recommends enforcement settlements to the ISA's chairman, develops them with violators and submits them to the approval of the Administrative enforcement Committee. Moreover, the Administrative Enforcement Department conducts proceedings to revoke or suspend individual licenses in accordance with the Investment Advice Law.
In addition, the head of the Administrative Enforcement Department serves as a counselor to the ISA’s sanctions committees regarding financial sanctions imposed under Chapter H3 of the Securities Law, Chapter J of the Joint Investment Law as well as Chapter G1 of the Advice Law.
29 The staff of the Administrative Enforcement Department takes part in developing enforcement legislation, in discussions regarding legislation which take place at the Ministry of Justice as well as in the Knesset, and also participate – as representatives of the ISA – in various forums dealing with economic enforcement.
Securities Department at the Tel Aviv District Attorney's Office
The Securities Department, which forms part of the Tel Aviv District Attorney’s Office (Taxation and Economics), was established for the purpose of focusing resources and professional capabilities on battling money laundering and white collar criminal activity and establish sanctions and behavior norms through relevant legislation. With the development of the capital market, the need for effective protection of the investing public became evident as did the significance of criminal enforcement in this field.
The Securities Department prosecutes white collar offenders who have committed large scale securities violations. The Department has been successfully handling the inherent difficulties in this field: extensive investigative material, multiple offenders in single cases as well as legal and evidential complexity, as well as top notch legal representation of defendants and significant media interest. The Department's cases have been handling most of its cases through the Tel Aviv District Court's economic department, which was established in order to address securities cases.
30 IV Corporate Finance Department A. General
The Corporate Finance Department is in charge of all corporations which have issued their securities to the public, whether by way of bond issues or share issues. These include 648 reporting traded corporations, of which 497 are traded in Israel alone, 72 bond companies, 42 dual listed companies, 23 financial instruments, as well as 14 channels (banks and insurers). In addition, the Department is in charge of a few dozen delisted companies which are still required to report under law.
The Department employs accountants, lawyers, and economists, most of whom serve as points of contact for reporting companies. Most Department staff members are charged with professional responsibilities – in either a legal or accounting capacity. Each reporting corporation is handled by a point of contact as regards the reporting requirements prescribed under the Securities Law.
As one of the executive arms of the Israel Securities Authority, and as part of its role in protecting the interests of the investing public, the Corporate Finance Department's main role is to increase transparency in the capital market by civil regulation in accordance with the Securities Law.
For the purpose of fulfilling its duties, the Department operates on three levels: supervision, regulation, and enforcement.
In terms of supervision, the Department ensures that reporting corporations fulfill their reporting duties as prescribed by law, including: reviewing prospectuses and approving their publication; reviewing disclosures and accounting treatment in financial statements of reporting corporations (which are selected for review in accordance with a risk model); reviewing reports, particularly reports regarding transactions (mergers, transactions with controlling shareholders, purchase offers); conducting in–depth audits in reporting corporations (in accordance with Section 56f of the Securities Law); handling debt settlement agreements, etc.
In terms of regulation, the Department develops disclosure requirements and adjusts them to financial market dynamics, so as to best serve users, reflect material and relevant information and increase the use of reports for the purpose of making investment decisions. In this respect, the Department is conducting an extensive project for the purpose of abridging and improving financial statements, while setting the rules for segment–specific reporting wherever needed. In addition, the Department initiates numerous projects involving the development of the capital market, in which it plays an active role, such as the Underwriting Reform, amendments to the Companies Law, supervision over independent auditors (PCAOB), etc.
In terms of enforcement, the Department is mainly focused on imposing financial sanctions on reporting corporations or controlling shareholders therein which have violated the provisions of the Securities Law. Currently, after the administrative enforcement procedures have gone into effect, the Department is involved in various stages of administrative proceedings filed against reporting corporations.
31 B. Supervision
1. Public reporting – data and highlights
a. Prospectuses and capital raising
As part of its ongoing activity, the ISA dedicates considerable management resources and time inputs to reviewing prospectuses filed by reporting entities. These prospectuses undergo several types of reviews, based – inter alia – on the risk management policy set each year and prioritized according to the ISA’s work plan for reviewing annual and quarterly reports.
Applications for permits to publish prospectuses are reviewed by a team comprised of accountants and lawyers. According to the accepted procedure for full reviews (see below), draft prospectuses are first reviewed by the staff, following which meetings are held with representatives of the candidate offeror, where the ISA's comments are presented. It should be noted that in 2010, the ISA’s staff began reviewing the majority of prospectus drafts (excluding those of IPOs) by way of correspondence. This means that the ISA's comments on draft prospectuses and requests for clarifications arising from the reviews are addressed to candidate offerors by a question letter, so as to render reviews more efficient and ensure their uniformity (both for material reasons and for the purpose of efficient time management).
During 2012, 78 applications for permits to publish prospectuses were reviewed under full or partial procedures and 42 applications – under the brief review procedure.8
Table 1: No. of applications for permits to publish 9 prospectuses vs. permits granted in the past three years No. of shelf No. of No. of IPOs out of prospectuses out of Year applications No. of permits granted total no. of permits total no. of permits submitted granted granted 2010 221 161 (%17) 28 (%69) 111 2011 159 137 (%12) 17 (%68) 93 2012 120 102 (%2) 2 (%%86) 88
Data regarding capital raising and offerings in 2010-201110
In 2012, the business sector raised approximately NIS 2,784 million in stocks, stock options, and convertible bonds, NIS 2,396 million of which were raised locally. This as compared with NIS 3,988 million in the previous year, NIS 2,977 million of which were
8 Refers to prospectuses filed on the basis of the 2011 annual reports up to prospectuses filed on the basis of Q3/2012 financial reports. 9 The data refers to prospectuses filed and prospectuses which have been granted permits between January 31nd and February 1st. 10 Capital raising data in this chapter were taken from reports published by the Tel Aviv Stock Exchange.
32 raised locally. This year, the business sector raised approximately NIS 25,479 million through the issue of bonds (excluding convertible bonds), as compared with approximately NIS 31,979 million in the previous year. Furthermore, the business sector raised approximately NIS 513 million through the exercise of warrants,11 as compared with approximately NIS 1,189 million in the previous year.
Table 2: Issues and offerings by way of shares, convertible securities 12 and bonds in the past three years (NIS millions, in current prices) 2011 2012 Shares, warrants and convertible bonds: a. Public offerings Local shares and warrants 2,946 1,952 Local convertible bonds 51 443 Foreign issues 991 388 b. Private offerings Local shares and warrants 1,490 748 Local convertible bonds 12 100 Foreign issues 501 270 c. Exercise of warrants 13 Stock options 562 85 14 Participation unit options 50 64 Convertible bond options 7 0 Total shares, warrants and convertible bonds: 6,610 4,050
Bonds: a. Public offerings Corporate bonds 31,342 25,250 certificates of deposit 637 229 15 b. Private offerings Corporate bonds 2,581 8,030 TACT institutional bonds 5,306 5,330 Bonds of unlisted companies 437 476 16 c. Exercise of bond warrants 570 364
11 Including the exercise of warrants by subsidiaries. 12 Excluding index products.. 13 NIS 109 million of which by subsidiaries in 2011; there were no exercise by subsidiaries in 2012. 14 NIS 0.8 million of which by subsidiaries in 2012. 15 Excluding NIS 9,804 million for structured bond issues to subsidiaries in 2011, and excluding NIS 5,514 million for issuing structured bonds to subsidiaries. 16 NIS 228 million of which by subsidiaries in 2011.
33 Total bonds 40,873 39,678 Total funds raised from the public and private offerings 47,484 43,728
Shelf Prospectuses
Since 2005, when the amendment to the Securities Law and Regulations dealing with this issue came into effect, companies may offer their securities to the public under shelf prospectuses.
The main purpose of the amendment was to increase the accessibility of the capital market to companies, while reducing the costs incurred by them for a possible offering of securities to the public and reducing the time needed to raise funds, in effect, to a few hours. I.e., shelf prospectuses now enable issuers which meet the requirements of the amendments to offer securities to the public, by means of a single prospectus, a number of times during a period of two years from the date in which the prospectus was published (excluding prospectuses offering commercial securities), within a short time span (see Section 23a. of the Law).
Since the shelf prospectuses arrangement came into effect, and in order to allow companies and investors to prepare for first time application of shelf prospectuses, the ISA staff published a number of clarifications regarding the ISA’s intended policy as regards the said tool, including events which constitute violations of reporting requirements, for which the ISA may decide to bar violators from offering their securities under shelf prospectuses or subject it to certain conditions.
Such violations include, inter alia: (1) Delinquent filing of financial statements; (2) misleading or erroneous details in periodic or immediate reports (in this context, the ISA staff enforced incidents of failure to include highly material valuations); (3) violation of a disclosure requirement, for which a financial sanction has been imposed and/or an open investigation is underway or even an indictment has been filed; and (4) a company's officers have made statements regarding information previously unreported through MAGNA, including during the silent period prior to an IPO.
The above does not constitute an exhaustive list of violation types, but rather provides a general idea of the types of violations which may result in a corporation losing its entitlement to issue a prospectus.
An example of the above includes delinquent filing of immediate reports, in addition to the quality of reporting. In this context, the ISA staff examines the number and percentage of delinquent reports, the type of delinquent reports and how late they are filed. The ISA's staff attaches great significance to meeting current reporting requirements and timeliness thereof, since shelf prospectuses also rely on a corporation's current reports, thus, if a corporation does not meet the requirements of the law, it cannot enjoy the privilege of issuing a shelf prospectus.
Currently, due to the ISA's experience in handling shelf prospectuses, the ISA staff is weighing the possibility of amending the conditions for issuing by way of shelf prospectuses (and shelf offering reports there under), some of which were published as part of the exemptions document (proposed regulation exemptions). Recommendations for amendments are expected to be published during 2013.
One of the recommendations involves extending prospectus periods from two to three years. According to the latter, a corporation wishing to obtain an extension for an additional
34 year shall need to file an application to this effect and prove it has met reporting requirements.
In addition, during 2012, the ISA staff issued a Staff Legal Bulletin (SLB 103-28), according to which a public shell company which has been overtaken and a corporation which has changed its core business shall not be entitled to issue shelf prospectuses. For more details, please see the following Section 1 which deals with regulation and discusses staff and plenum bulletins, as well as FAQs.
During the past year, the ISA staff enforced this SLB in a number of relevant cases. Regarding cases arising prior to the publication of the SLB, permits for shelf prospectuses were granted but corporations were permitted to issue them only after the public shell had been active for a period of twelve months after having been overtaken. Presently, after the SLB has been published, such corporations shall not be permitted to file shelf prospectuses.
Table 3: Shelf prospectuses in the past three years
Year No. of corporations offering Total no. of shelf offerings securities under a shelf prospectus 2010 95 216 2011 102 144 2012 96 124
b. Reporting requirements
A corporation whose securities have been offered to the public is bound by various reporting requirements under the Securities Law and Regulations, as long as its securities are held by the public. Such requirements include filing immediate reports as well as annual and quarterly financial statements.
As part of the ISA's ongoing monitoring of financial statements, the Department continually examines, using various sampling techniques – financial statements filed by reporting corporations, so as to ensure that fair disclosure principles is met, as well as compliance with the Securities Law, Regulations, and provisions and with generally accepted accounting and reporting principles, the purpose of which is to ensure fair disclosure. If necessary, such corporations are instructed to amend their immediate reports or annual and quarterly financial statements, while in other cases corporations are instructed to clarify published reports, complement information and/or disclose additional information to the public.
When a violation of the Law is discovered, the ISA may impose a financial sanction on the violating company. If the ISA suspects that the violation was due to criminal motives, the matter is submitted to the ISA's Head of the Investigations, Intelligence and Trading Control Department, following a hearing.
35 c. Financial reporting and valuations
1. Review of financial statements Three years ago, the Department’s management developed a new strategy, whereby the Department should move from market-dictated activity (reviewing prospectuses filed with the ISA) to initiated supervisory activity, by using the resources previously invested in reviewing prospectuses to initiate reviews of financial statements of reporting corporations.
During 2012, the ISA’s staff continued to initiate reviews of financial statements filed by reporting corporations. The financial statements to be reviewed are chosen in accordance with the level of risk and liquidity of the reporting corporations, which is determined in line with an internal risk model created by the ISA, which supports staff decisions arising from their close acquaintance with the reporting companies and takes into account the time that has elapsed since a report filed by a corporation was last reviewed.
In reviews conducted this year, the ISA’s staff focused on the proper implementation of International Financial Reporting Standards (IFRS) as regards the following issues: a. Accounting 1. Segment reporting (IFRS 8); 2. Business combinations, and the existence of significant control and influence (IAS 27 ,IAS 28 ,IFRS 3), and adequate accounting for holding percentages, while examining whether a change in the nature of the holding has taken place (significant control or influence); 3. Accounting for business combinations under common control transactions; 4. Revaluation of investment property (IAS 40), including the adequacy of evaluations included therein and the reasonability of their underlying assumptions; 5. Classification of current and noncurrent assets as well as current and noncurrent liabilities; 6. Adequacy of classification of real estate properties and property, plant and equipment in financial statements (inventory; investment property; property, plant and equipment); 7. Adequacy of disclosure regarding testing for the going concern assumption underlying the preparation of the financial statements (IAS 1), as well as the phrasing of the auditor’s opinion as regards this issue; 8. Impairment of assets (IAS 36); 9. Impairment of financial instruments, especially impairment of available-for-sale financial assets (IAS 39); 10. Adequacy of the timing of creating and unwinding provisions (IAS 37); 11. Impairment of financial instruments, especially impairment of available-for-sale financial assets (IAS 39);
36 12. Assessing the manner and timing of recognizing income, including the income reporting basis (net or gross); 13. The manner of presenting restricted cash, including cash borrowed from banks for real estate projects; 14. Functional currency. b. Legal: 1. Issues regarding the identity of a corporation's controlling shareholder; 2. Holding of a corporation's shares, including joint holding; 3. Approval of transactions with controlling shareholders or transactions in which controlling shareholders have a vested interest; 4. Approval of transactions with a corporation's officer; 5. Interest and marginality of interest of external directors and independent directors; 6. Marginal transaction procedure; 7. Assessing the conduct of the board of directors and its committees, including the issue of directors' personal interests; 8. Risk exposure and management thereof; 9. Distributions, including purchase of own shares; 10. Internal auditing; 11. Issues concerning the independence of auditors. c. In the area of disclosure guidance – the staff focused on assessing the implementation of gas and oil exploration disclosure guidance and investment property disclosure guidance. Table 4: Initiated review of financial statements during the past three years Year No. of financial statements reviewed 2010 66 2011 65 2012 49
2. Valuations The use of valuations for reporting purposes or in order to establish the grounds for accounting data has been the practice for many years. Valuations serve, inter alia, for transactions with interested parties, full purchase offers (especially by way of mergers), as well as for financial reporting. The adoption of IFRS has increased the use of valuations, inter alia for the purpose of evaluating investment property; business combinations (PPAs); impairment testing and recoverable amount; actuarial assumptions; share based payment transactions, etc.
37 In order to ensure the reliability of reporting in general – and of financial statements in particular – especially those of publically traded companies, the ISA has decided to prioritize the issue of monitoring the level of disclosure and adequacy of valuations.
For this purpose, in 2012 the staff conducted in-depth assessments of a number of valuations, in some cases – with the help of external experts. Such steps have led to increased disclosure as regards certain issues pertaining to valuations, including: substantiating underlying assumptions; including information such as projections in relation to past results as part of the valuations; substantiating fair value by using additional methods; creating methodologies, etc. In certain cases – following the ISA’s interference – some companies were required to restate their financial statements.
In order to further improve the quality of valuations and appraisals, the ISA completed a tender for the provision of valuation services (as needed) in 2012.The five winners will provide services for the purpose of conducting in depth audits of real estate valuations. After the tender was completed, the ISA began conducting a number of audits. Please see Section 5, which deals with audits and outsourcing in the Corporate Finance Department.
Valuations also serve for calculating actuarial obligations (and plan assets) of corporations as regards employer-employees relationships. Such actuarial assessments require specific education and training. During 2012, the ISA began to assemble a pool of certified actuaries who can assist the ISA, as necessary, in reviewing actuarial assessments used for financial reporting.
d. Transactions with controlling shareholders
Transactions of publically-traded companies in which controlling shareholders have a vested interest exemplify most explicitly the issue of agents in centrally-controlled companies, which characterize the Israeli market and may damage the public's confidence in the capital market.
For this reason, the Companies Law limits a company’s ability to enter into such transactions to those that benefit the company and have undergone approval according to a procedure which includes the support of a special majority of shareholders who have no vested interest in approving the transaction. Until Amendment 16 was enacted, the above majority constituted one third of the shareholders who had no vested interest as aforesaid. As part of Amendment 16, this portion was increased so that as of May 15, 2011, such transactions require a majority of the shareholders who have no vested interest.
Transactions involving the vested interest of a controlling shareholder and which are subject to the special approval procedure detailed in Section 270(4) of the Companies Law, and include irregular transactions carried out with a controlling shareholder or in which a controlling shareholder has a vested interest, or private offerings in which a controlling shareholder has a vested interest, as well as approval of the terms of employment or tenure of a controlling shareholder or a relative thereof.
On February 17, 2012, Amendment 17 to the Companies Law came into effect. The Amendment prescribes corporate governance requirements for private bond companies as well, including a special approval mechanism for transactions with
38 controlling shareholders or transactions in which controlling shareholders have vested interests.
Acknowledging the implications of such transactions, the Securities Law treats them in a special manner in various regulations:
Securities Regulations (Transaction between a Company and a Controlling Shareholder therein) of 2001 (hereinafter – the Controlling Shareholder Regulations) determine disclosure requirements that apply to reporting companies in connection with the special approval procedures required for such transactions.
In addition, when a transaction with a controlling shareholder does not require specific approval in a shareholders’ meeting, the company is required – under the Securities Regulations (Periodic and Immediate Reports) of 1970 – to disclose it in an immediate report as well as in its annual report.
The transactions included in the aforesaid reports are numerous and varied. Most reports were concerned with approval of terms of tenure and employment of controlling shareholders and their relatives as officers of the company. Other reports filed in accordance with the Controlling Shareholders Regulations dealt with the purchase of business operations from a controlling shareholder; purchase of goods and equipment from the controlling shareholder; acquisition of shares in another company controlled by the controlling shareholder; sale of business operations or assets to a controlling shareholder; collaterals; guarantees; deposits; financing agreements; provision of various services; insurance arrangements; acquisition of knowledge, etc.
As in recent years, and especially in light of the aforesaid effect of Amendments 16 and 17 as aforesaid, the Corporate Finance Department team invested significant efforts in reviewing disclosures provided to the public as regards such transactions, so as to ensure that shareholders have all of the information needed for them to reach voting decisions.
In addition to reviewing disclosures of such transactions, the Corporate Finance Department reviews various issues related to transactions between a company and its controlling shareholders as to whether they meet the provisions of the Companies Law, such as determining whether transactions are irregular; whether transactions between companies and other parties constitute transactions in which a controlling shareholder has a vested interest; determining whether shareholders are interested parties regarding the approval of a transaction; whether the asset or operation around which the transaction evolves is material; whether the approval process of a transaction by various company organs is adequate; qualifications of external directors; how the audit committee operates, etc.
As in previous years, in 2012 emphasis was placed on examining voting results in general meetings. As part of its work on this issue, the ISA staff continues to contact companies, requesting information as regards voters in their general meetings, including their ties with the company and its controlling shareholder. In addition, in 2011 a disclosure directive was issued by the ISA, whereby corporations are required to provide disclosure – as part of reporting meeting results – as regards the manner of voting by shareholders which are institutional bodies, interested parties and senior officers.
39 During the past year, the ISA staff dedicated special attention to examining the procedures for approval of transactions in the board of directors and companies' audit committees, ensuring that the transactions brought to the approval of the shareholders benefit the company. In some cases, the staff expressed its opinion that certain actions taken by the organs of companies as part of the approval of the transaction do not benefit the company. Such an opinion is expressed only in extreme cases and involves an in-depth legal review.
During the year, the ISA's staff was involved in the legislation procedure of Amendment 20 to the Companies Law. For more information, please see Section 4, which deals with regulation. While most of the Amendment's provisions came into effect on December 12 (hereinafter – the effective date), the ISA's staff identified a number of cases in which corporations issued a notice regarding meetings prior to the effective date, with the date of such meetings occurring after the effective date. In such cases, these corporations were ordered to obey the provisions of the Law and Companies Law following the Amendment's effective date.
Table 5: No. of transactions with controlling shareholders during the past three years Total no. of immediate reports regarding transactions between a Year company and its controlling shareholder No. of reports17 No. of reported transactions18 2010 38619 – 2011 569 – 2012 442 776
e. Private offerings
Private offerings in Israel are regulated by the Companies Law and the Securities Regulations (Private Offering of Securities in a Listed Company) of 2000 (hereinafter – the Private Offering Regulations). The Companies Law prescribes the approval mechanisms needed in order to carry out various types of private offerings and regulates the level of disclosure and details required for each type.
The Private Offering Regulations determine three levels of disclosure: exceptional private offerings, which require the most extensive disclosure; substantial private offerings; and insubstantial private offerings, as defined in the Private Offering Regulations. An exceptional offering is an issue of securities granting 20% or more of the total voting rights in a company before the offering, or an offering resulting in the offeree becoming a controlling shareholder in the company. A substantial offering is an issue to a party holding 5% or more of the issued capital or the total 17 The data relate to the number of meeting summons reports for approving transactions with controlling shareholders issued during the year. 18 These data include 318 transactions classified as "other" in 2012, which may include transactions with parties other than controlling shareholders. 19 In 2010, 470 transactions with controlling shareholders were brought to approval by shareholders' general meetings, under 386 summons reports.
40 voting rights in the company, or to a party that will hold that amount after the offering, and any offering to a director or chief executive officer that is not an exceptional offering. Any other private offering that is neither exceptional nor substantial is an insubstantial private offering.
The authorization mechanisms required of a company to carry out a private offering is specified in the Companies Law, according to the total percentage of issued capital, the consideration paid (by way of cash and securities or otherwise) and the characteristics of the offeree. According to the Companies Law, the general meeting is required to approve private offerings following their approval by the board of directors only when the offering is a “substantial private offering” as defined in the Companies Law. 20The Companies Law also requires that a private offering be approved when the controlling shareholder has a vested interest therein, whether or not it constitutes an irregular transaction. This approval is to be granted under a special format prescribed by the Companies Law.
Private offering reports are reviewed by ISA staff as part of the ongoing review of companies' reports. According to the provisions of the Private Offering Regulations, the ISA is authorized to request explanations, further details, information and documents, and – if necessary – instruct that an immediate report be amended. The ISA staff exercises its power in cases where, in its opinion, the details provided in an immediate report are incomplete or unclear. In such cases, the company issues a revised immediate report and shareholders are issued an amended notice regarding the private offering, which includes the missing details and clarifications. In certain cases, and subject to the Regulations, the ISA may order a postponement of a shareholders' meeting of no less than three business days and no more than 21 days from the date of publication of the revised report.
Table 6: Private offerings (substantial and exceptional) during the past three years Year Total no. of reports regarding private offerings 2010 181 2011 135 2012 142
f. Purchase offers
20 According to the Companies Law, a "substantial private offering" is an allocation where one of the following transpires: (a) An offer of 20% or more of the voting rights in a company when all or part of the consideration is not paid in cash or securities listed for trading, or is not according to market conditions (as defined under the amended version of the Law) and as a result of which the holdings of securities by a principal shareholder (i.e. - a shareholder holding 5% or more of the issued capital or voting rights of a company) shall increase, or which shall result in an individual becoming a principal shareholder following the issue; (b) An offering which shall result in an individual becoming a controlling shareholder in the company. In addition, Amendment 3 broadened the definition to include an offering by a public company to sell dormant securities, which is not a public offering (i.e. - selling dormant shares outside the course of trading on the Stock Exchange).
41 The Securities Regulations (Purchase Offer) of 2000 (hereinafter – the Purchase Offer Regulations) require the filing of a purchase offer specification in three cases:
1. An ordinary purchase offer, i.e. – an act of an offeror intended to induce holders of a listed company's securities or convertible securities to sell securities to the offeror;
2. A full purchase offer, as defined under Section 336 of the Companies Law;
3. A special purchase offer, as defined under Section 328 of the Companies Law.
Those seeking to make a purchase offer to the shareholders of a listed company must do so by means of a written specification, as prescribed by the Purchase Offer Regulations.
Under the Purchase Offer Regulations, the ISA is authorized to demand explanations, further details, information and documents regarding information included in a purchase offer specification, and regarding any other matter which the ISA believes should be included in the specification pursuant to the Regulations. Furthermore, the ISA may even demand that the specification be amended
Thus, offerors were required to include various details in their specifications, such as: material events after the balance sheet date and their expected impact; the offeror's agreements with other parties; exclusion of offerees; personal interest of offerees, etc.
Table 7: Purchase offers in the past three years Year Ordinary Full purchase offer Special purchase Total no. of purchase purchase offer offer specifications offer
2011 12 44 0 56
2012 8 31 6 45
g. Bond settlement agreements and bond trustees
In recent years, extensive debt has been raised by means of public bond offerings, as an alternative to borrowings from banks. The global credit crisis and its local consequences have adversely affected the issuing companies' ability to repay bondholders and subsequently to recycle their debts. In 2012, 28 corporations initiated debt settlement proceedings with their bondholders, as compared with 34 in 2011. Due to the expected increase in the volume of maturities for 2013 and 2014, the number of corporations likely to open debt settlement negotiations with their bondholders remains high.
Ongoing processing of debt settlement agreements
As part of its ongoing processing of debt settlement agreements, the ISA reviews: disclosures made by companies both as part of the settlement and prior to it; disclosure provided by a controlling shareholder in cases where the settlement includes the controlling shareholder's commitment to repay bondholders, whether through independent sources of his own or through a company under his control; the
42 need to obtain the court's approval to an agreement by nominating a specialist in light of Amendment 18 to the Companies Law; the need to issue a prospectus as part of the agreement so as to guarantee the interests of the intended offerees; and the feasibility of issuing the proposed securities and their listing for trade as required by law.
As part of agreements made under the auspices of the court, in accordance with Section 350 of the Companies Law, the ISA is usually required to express its position regarding: the manner in which a class meeting is assembled; the disclosure provided to holders of securities of the corporation prior to deciding whether to approve the agreement; the need to nominate a specialist in order to review the proposed settlement. Furthermore, the ISA occasionally presented its position to the court, of its own accord, pursuant to Section 35O(b), in cases where the ISA considered it its duty to protect the interests of investors in securities.
2. Reports filed with the ISA and requests for exemptions / extensions a. Termination of reporting requirements During the past year, the ISA sought to promote an outline to amend the Regulations regarding additional alternatives for termination of companies’ reporting requirements (under Amendment 2 to the Periodic and Immediate Reports Regulations), beyond the existing alternatives under the current Regulations,21 in order to match them to current circumstances, such as: a court–sanctioned increase in the number of securities holders, the manner in which struggling companies terminate their reporting requirements; as well as the termination of reporting requirements for companies following a decision by the ISA (in special cases, when all conditions are met). A proposed draft amendment was issued for public comment in 2011. The Department is currently drafting a final version for the Regulations, which will then be submitted for the approval of the Ministry of Finance and later published.
Table 8: Companies which ended their reporting requirements in the past three years Year Total no. of companies 2010 20 2011 3022 2012 3323
b. Exemption applications
21 Regarding the number of the company’s shareholders from among the public – according to one alternative – ten shareholders, and according to another – 35 shareholders, including additional conditions detailed in the Regulation. 22 In addition, six corporations whose reporting requirements ended in 2011 received a letter to that effect from the ISA during 2012, after they failed to report to the ISA about the end of their reporting duties. 23 In addition, nine corporations whose reporting requirements ended in 2012 are evaluated for the purpose of being issued a letter announcing the end of their reporting duties by the ISA in 2013.
43 Pursuant to the powers granted to it under the Securities Law, the ISA may exempt corporations from certain reporting requirements, including the publication of prospectuses in accordance with Section 15d of the Securities Law. Such exemptions are granted to companies listed outside Israel that do not constitute reporting companies as per the offer of securities to their employees and their Israeli subsidiaries as part of an employee compensation plan. In addition, the ISA exempts companies from specific disclosures if it deems that the latter constitute trade secrets which justify their non–disclosure or if their disclosure may harm Israel’s security or its economy or an investigation conducted by the Israeli police or the ISA. Such exemptions are granted for prospectuses under Section 19 of the Securities Law, and for current reports – under Section 36c of the Securities Law.
Table 9: Exemption applications filed in the past three years
No. of fully approved exemption Year Total no. of exemption application filed applications 2010 71 64 2011 58 58
24 2012 31 25 c. Exemption applications According to the Securities Law, the ISA, or an authorized employee thereof, may extend the time prescribed in the Regulations for filing reports (hereinafter – grant extensions), if they are convinced that a company is unable to file its report on time (see Table 10 below). The ISA attaches great importance to the timely filing of reports, and not merely to the disclosures included in them. As a result, the ISA exercises its power to grant extensions only in very exceptional cases. Currently, in accordance with an amendment to the Securities Law which became effective in October 2007, the ISA may impose financial sanctions on companies which are late in filing their reports. For further information regarding financial sanctions, please see Section D below, which deals with enforcement.
Table 10: Extension applications filed in the past four years Report Year No. of No. of Extensions Extensions Extensions applications applications granted for granted for granted for submitted denied up to 30 days 31-60 days up to 60 days No. % Annual 2009 7 5 %71 2 – – 1Q 2010 3 1 %33 2 – – 2Q 2010 3 3 %100 – – – 3Q 2010 4 0 %0 1 3 – Annual 2010 7 4 %57 – – 3 1Q 2011 2 1 %50 – – 1
2Q 2011 4 1 %25 – 1 2
3Q 2011 0 – – – – –
24 Two of which were pulled by the company and four are still being processed by the ISA.
44 Annual 2011 8 4 %50 1 1 2
1Q 2012 5 2 %40 2 – 1 2Q 2012 4 2 %50 – – 2 3Q 2012 7 1 %14 2 1 3 3. Audits and outsourcing in the Corporate Finance Department As part of its implementation of the ISA’s supervision strategy, the Corporate Finance Department conducts audits of reporting companies. These audits are carried out, inter alia, under Section 56F of the Securities Law. According to this Section, audits of reporting companies may be carried out by persons who are not ISA employees, including accountants, lawyers, land appraisers and other professional service providers. The purpose of these audits is to examine whether the provisions of the Law have been met. Furthermore, they are intended to complement the Department's ongoing supervision of reporting companies and reports issued by them, so as to promote transparency and fair disclosure and uphold investors' interests. In 2012, the Department carried out eight audits, as compared with seven audits in 2011:
a. Real estate –
Verifying the reasonableness of appraisals of three real estate properties in two reporting entities; Examining the conduct of the board of directors and its committees in reviewing appraisals of real estate properties in two reporting corporations; Reviewing the work of accountants in cases where financial statements of two reporting entities were found to be faulty, as a complementary procedure to audits conducted the year before; b. ISOX – examining the relationship between a publicly traded parent company and a publicly traded subsidiary in defining highly material processes;
c. Actuary – examining actuary work done by a reporting corporation in relation to IAS 19 on the issue of employee benefits.
4. Underwriter registry In July 2007, a comprehensive reform of public offering procedures became effective. It included, inter alia, a prohibition on issuing securities in a tender with a maximum price; the option of accepting non–uniform offerings, similar to those accepted in Western capital markets; the option to file a separate report, at a later date, in order to obtain a permit to issue a prospectus regarding the price and number of securities offered and thus reduce issuance expenses; and a comprehensive reform regarding underwriters' powers and the extent and quality of reporting required of them.
As of the date the aforesaid reform became effective, anyone wishing to act as an underwriter must first register with the Underwriters Registry, maintained by the ISA. The ISA is also authorized to strike underwriters from the Registry.
45 Table 11: Underwriter registry in the past three years
Total no. of active No. of foreign No. of inactive Year underwriters underwriters underwriters 2010 25 2 46
2011 23 2 46 2012 22 2 46
In 2012, no company was registered in the Underwriter Registry, in comparison with three companies in 2011. In 2012, two underwriters announced they were ceasing activity, as compared with four in the previous year.
Regarding publishing a comprehensive paper on legislative amendments in the underwriting and adjoining fields, please see Section C below on regulation.
In 2012, the Chairman of the ISA exercised his ISA power under Section 35O(b) of the Securities Law to appeared before the court in an approval procedure of a lawsuit as a class action lawsuit against Landmark Group Ltd. (hereinafter – Landmark), its directors at the relevant time and investment houses which served as underwriters in its public offering (ISA also funds the lawsuit in part). The following issues were discussed before the court: the underwriters' accountability for allegedly misleading details included in Landmark's prospectus and the scope of the defenses for underwriters in an offering under Section 33 of the Securities Law. Due to a possible broad impact which a decision on these issues may have, including its possible impact on underwriters' accepted practices as well as on other entities in the capital market, the Chairman of the ISA exercised the abovementioned power, and the ISA presented its stance to the court, inter alia regarding said issues. For details about said stance and its acceptance by the court, please see the Legal Counsel Chapter, under class actions and derivative suits which the ISA was party to or expressed its stance therein.
5. Dual listing In November 2000, an amendment to the Securities Law went into effect, adding Chapter E3 concerning dual listing of companies. Under the amendment and a later amendment, corporations traded on the NASDAQ, NYSE, AMEX, or LSE Main Market – Primary Listing may be listed on the Tel Aviv Stock Exchange on the basis of reports identical to those filed by said corporations abroad. According to the amendment, companies that were dually listed when the amendment became effective or companies registering for trade on the Exchange in the future, and subsequently on one of the aforementioned exchanges, may begin reporting in accordance with Chapter E3, provided a majority of non-controlling shareholders agree thereto.
According to the amendment, companies wishing to register for trade under Chapter E3 must have traded on a foreign exchange for a minimum of one year prior to their listing in Israel. An exception was made for companies whose market capitalization is at least USD 350 million. This amount was later amended so that the current requirement is a market capitalization of at least USD 150 million.
46 In the reporting year, two dual listed companies were listed for trading on the Exchange as compared with three such companies the previous year. In 2012, no company switched to the dual listed reporting format, as compared with one in 2011. As of the end of the reporting year, there was a total of 44 dual listed companies on the Stock Exchange. In 2012, two dual listed companies became reporting corporations, as compared with none in 2011. Two dual listed corporations were delisted.
It should be noted that in general, the provisions prescribed by the Securities Law apply to reporting under Chapter E3 both on civil and criminal levels. However, as far as the review of reports is concerned, the ISA takes into consideration the fact that dual listed companies are supervised by the SEC or the FSA, which implement some of the strictest supervision regimes in the world. This constitutes the basis for the ISA's decision to grant allowances under Chapter E3, exercising its authority while taking into account the aforesaid. Therefore, in general, the ISA relies on the supervision of these foreign organizations. In addition, in accordance with Chapter E3, in cases where the ISA considers exercising its authority, it first contacts the SEC or FSA, as needed.
In April 2012, the ISA staff published for public comment an SLB regarding changes in the treatment model and granting exemptions to dual listed companies issuing securities, especially bonds, in Israel alone. The proposed change applies additional reporting requirements to dual listed corporations and shall be implemented gradually, with the aim of balancing various interests, mainly protecting the investing public bondholders and the principle of relying on dual listed companies, in line with the previous arrangement for the issue of bonds in Israel alone.
C. Regulation – Staff Legal Bulletins and special projects in 2012 1. Staff and Plenum legal bulletins and FAQs
As every year, the ISA published on its website the accounting and legal decisions made by its staff, which are of principal interest to investors and reporting companies. These publications were made under a variety of formats, including the publication of SLBs (Staff Legal Bulletins), FAQs (Frequently Asked Questions), pre- ruling directives, enforcement decisions, as well as clarifications by way of notifications to companies. In this manner, the ISA seeks to increase transparency and minimize uncertainty among reporting companies
Staff and Plenum position papers: Staff and Plenum SLBs are professional position papers which reflect the decisions and positions of the staff or Plenum on issues regarding the implementation of the Securities Law and Regulations. They appear on the ISA website. The content of the position papers guides the ISA and its staff regarding the manner in which to exercise their authority and enables the public to apply them in similar circumstances. At times, the ISA issues staff position papers regarding corporations' immediate reports, which also appear on the ISA website. In addition, the ISA staff publishes notifications to companies on its website, under the title Notifications to Companies.
FAQs: As of January 2008, all companies subject to the Securities Law file reports in accordance with International Financial Reporting Standards (hereinafter – IFRS). In
47 order to improve uniform accounting, minimize uncertainty regarding the application of IFRSs, ensure fair disclosure in problematic areas, and in order to provide answers to questions raised by reporting entities and accountants regarding IFRS reporting during the initial adoption period of IFRS in Israel, the Department's staff issued FAQs regarding matters pertaining to reporting in accordance with IFRS, the application of the Standards, and additional disclosures required under the Securities Regulations and directives issued pursuant to the Law.
The following is a summary of the Staff and Plenum positions & FAQs published in 2012 1. Update of Decision No. 99-4 regarding Guidelines for Testing the Materiality of Errors in Financial Statements and Staff Legal Bulletin No. 105-24 regarding the Format for Issuing Corrected Financial Statements (hereinafter – the SLB).
In March 2012, an SLB was published on the subject, is in lieu of Decision No. 99–4 regarding Materiality for the Purpose of Correcting Errors in Financial Statements, issued in 2005, which set guidelines – both quantitative and qualitative – that serve the ISA's staff in testing for the materiality of errors in financial statements requiring restatement. In addition, this SLB includes guidelines for testing for the materiality of errors contained in interim financial statements, which will increase market certainty as to the manner in which the materiality of errors is currently tested for, as well as guidelines for the manner and timing in which corrected financial statements are issued.
In addition to this SLB, the ISA also issued a disclosure directive under the provisions of Section 36a(b) of the Securities Law, regarding a disclosure to be included in immediate reports regarding material errors which require restatement and disclosures to be included in the board of directors' report attached to financial statements amended following the discovery of a material error.
2. SLB No. 103–27 – Amendment 1 to the Securities Law and Amendment 1 to the Investment Advice Law – FAQS
In the first half of 2011, the Securities Law was updated so that it includes, among its list of various kinds of investors, "qualifying clients", who meet certain requirements in the Investment Advice Law, such as: owning a minimum of liquid assets, possessing skills and expertise in the capital market investments and having a minimum of capital market transactions. The addition of "qualifying clients" to the list of investors as aforesaid arises from the awareness of the regulator that a qualifying client is a sophisticated investor, and thus does not need to be protected by law in terms of a requirement to issue a prospectus for an offering of securities. This amendment to the Law raised various questions among market players as to conditions for "qualifying clients". The purpose of the SLB is to answer such questions, in cooperation with the Investment Department staff.
3. SLB No. 103–28 – A shelf prospectus for a newly overtaken public shell company and for a corporation which has altered its core business
Amendment 1 to the Securities Law (Conditions for an Offering by Way of a Shelf Prospectus) of 2005 requires, as a prerequisite, that offerings of securities through a shelf prospectus shall be allowed provided that the issuer is a "reporting
48 corporation that has been offering its securities to the public by way of a prospectus for at least twelve months..."
According to the purpose of the Law, this period (12 months) is intended to serve as an adaptation phase for both investors and the reporting corporation. It allows for the creation of a securities price history, which helps the public make investment decisions and allows it to ascertain that the corporation has met current reporting requirements.
In a number of cases, following the publication of the SLB, the ISA staff expressed their opinion whereby similarly to a reporting corporation which has first offered its securities to the public less than 12 months ago, a corporation without genuine activity (a public shell company), which was overtaken by a new activity less than 12 months ago is not entitled to obtain a permit to publish a shelf prospectus before that period has elapsed since the public shell was overtaken (provided that the corporation has met its reporting requirements during that period),25 and will not be able to offer securities based on a shelf prospectus approved prior to the public shell being taken over.
In addition, a corporation which has received a permit to publish a prospectus and then changed its core activity,26 rendering the disclosures contained in the shelf prospectus irrelevant, will not be permitted to issue additional securities based on that shelf prospectus. (The question whether such as corporation requires an adaptation period of 12 months before obtaining a permit to publish a prospectus depends on the particular circumstances of that corporation.)
4. SLB 105–25 – Abridging of financial statements
One of the purposes of the ISA Roadmap is to significantly improve the equality and usability of periodic reports in terms of relevance and understandability. For this purpose, the ISA published an SLB on the issue of abridging periodical reports in December 2012. The SLB outlines the ISA's position on the manner in which such reports should be improved while meeting the existing disclosure requirements. For more information on this issue, please see under Regulation, Section 4(a).
5. FAQ 20
In September 2012, the ISA published FAQ 20 on the issue of disclosures required prior to first time adoption of IFRSs on issues such as consolidated financial statements, joint arrangements, investments in associates and joint ventures and disclosure of interests in other entities. The FAQ deals with the scope of disclosure to be included in financial statements of reporting corporations regarding the impact of adopting new financial reporting standards on issues such as consolidated financial statements (IFRS 10), joint arrangements (IFRS 11),
25 In this matter, please refer to SLB 103–24 (regarding shelf prospectuses) from November 2005 (updated in February 2006), where – according to Section 2 – a corporation which is a public shell will not be permitted to publish a shelf prospectus. When assessing whether a company constitutes a public shell, it shall consider, inter alia, criteria such as lack of activity and scarcity of assets. 26 For example, a corporation which has sold or removed most of its assets and/or acquired a significant amount of assets in an activity not specified in the shelf prospectus.
49 associates (revised IAS 28) and disclosure regarding interests in investees, as well as when such disclosures should be made.
6. SLBs published following reports issued by reporting corporations or opinions by the ISA filed with the court
In 2010, a new pool of SLBs published by the ISA following public reports issued by companies was created on the ISA's website. The pool includes SLBs issued in the past regarding specific cases which the ISA staff deemed relevant for a broader audience, as well as opinions that the ISA has submitted to courts regarding fundamental issues. In addition to the abovementioned pool, the website includes pre-rulings issued by the ISA on similar matters.
In 2012, the ISA's staff issued three SLBs in response of reports issued by corporations. All SLBs were concerned with the issue of controlling shareholders:
1. In January 2012 an SLB was published regarding a report by the Shlomo A. Angel Company. Accordingly, one of the company’s suppliers, for which the company constituted a material client, shares a vested interest in certain transactions with the company’s controlling shareholder.
2. In August 2012, the ISA published an SLB regarding a report issued by N. Feldman and Son Ltd., according to which a shareholder who is a senior officer of the company and is involved with the company in a loan transaction shares a vested interested in certain transactions with the company's controlling shareholders.
3. In August 2012, the ISA issued an SLB regarding a report published by Melisron Ltd., according to which when altering a transaction with a controlling shareholder, the irregularity of the transaction is assessed in relation to the transaction as a whole, rather than in relation to the change for which the company is seeking approval. In addition, an approval extended by a general meeting in the past for amounts to be paid for services rendered to a certain entity does not mean that these amounts reflect "market conditions" at a later time, especially since the identity of the party has changed.
In addition, during 2012 the ISA staff submitted seven position papers to courts regarding legal proceedings of public companies, including:
1. In March 2012, an opinion was submitted to the Supreme Court as part of a legal dispute between a publicly traded company, its controlling shareholders and a material shareholder. The ISA staff expressed its opinion regarding disqualifying a minority shareholder voting against a controlling shareholder transaction in a general meeting, including as to the identity of the entity authorized to disqualify voters and tests for such disqualification.
2. In March 2012, the ISA submitted to the Tel Aviv District Court (Economic Department) its opinion regarding the manner in which controlling shareholder transactions should be approved in a conglomerate. According to the opinion of the ISA staff, when a public company controlled by a public company engages in a transaction with a conglomerate's controlling shareholder, there is no need for approving the transaction in accordance with the provisions of Sections 270(4) and 275 of the Companies Law in the
50 controlling company as well (in addition to approval in accordance with the provisions of said sections in a controlled public company).
3. In May 2012, the ISA submitted its opinion to the Jerusalem District Court regarding a request by a controlling shareholder in a public company from the court to determine their compensation as senior officers of the company. However, the terms of their employment were not approved by a general meeting (due to opposition from a minority shareholder, who was sued for allegedly not meeting his duties as a shareholder in the company). According to the ISA's opinion, in general, in such cases there is no room for granting the controlling shareholders temporary relief until the court decides on the main lawsuit, which the controlling shareholders filed against the minority shareholder.
4. In May 2012, the ISA submitted to the Tel Aviv District Court (Economic Department) its opinion regarding a company's solvency for the purpose of making distributions. The company was inactive and was about to change its core business.
2. Pre-rulings
The pre-ruling procedure allows companies to submit legal and accounting queries prior to taking action, in order to evaluate the proper course of action. Pre-rulings usually deal with complex issues that have innovative aspects or are broad in scope, where the answer is not self-evident. The ISA prioritizes queries according to urgency and necessity, in line with the above mentioned characteristics. There are two main kinds of queries:
Request for a pre-ruling regarding a planned transaction; Request for a pre-ruling regarding the proper accounting treatment of a transaction which the requesting company has engaged in or is a party to; Request for a no-action letter, i.e. – a statement confirming that the ISA will not take any enforcement action against the company under the circumstances described in the request.
In January and April of 2007, the ISA made decisions regulating the issue of pre- rulings and their publication. The procedure was updated in June 2008. According to a decision published by the ISA, pre-ruling requests must be submitted in keeping with the specified procedure as published (including the manner in which to submit requests, information to be included in requests, publication of the request and answer thereto). The query and the answer are published on the ISA website, following criteria specified by the ISA.
During the year, the procedure was updated with an additional paragraph addressing the issue of deadlines, according to which the ISA shall follow its procedures so as to make sure that its decision is accepted and delivered to the requesting company 60 days following the date in which the pre-ruling request was submitted in accordance with the procedure or the date in which the ISA staff received all the details required in order to produce its pre-ruling, the later of the two. In addition, if the request for pre-ruling includes a no-action letter, an issue
51 with broad and material implications or one that requires the involvement of other ISA departments, the answer may be provided later than the said 60 days.
In 2012, 93 pre-ruling requests were submitted, as compared with 76 such queries in 2011.
Table 12: Requests for pre-rulings in the past three years
Year No. of accounting requests No. of legal requests Total no. of requests 2010 51 32 83 2011 25 51 76 2012 63 30 93
In 2012, the Department handled 30 legal pre-ruling requests as compared with 51 such requests in 2011. In addition, three legal pre-ruling requests submitted in 2011 were handled in 2012. Out of the legal pre-ruling requests submitted in 2012, one request contained accounting issues and questions as well.
Most of the legal questions in the past year dealt with the following issues: whether an offering securities constitutes a public offering; whether external directors are qualified; approval of transactions with current and former company officers and controlling shareholders; vested interests of controlling shareholders; holdings of principal shareholders; purchase offers; classifying directors as independent; joint holdings; criteria for issuing immediate reports; exemption from filing financial statements; repurchase of securities; SEDA mechanism; prohibition on using insider information etc.
In 2012, 63 accounting pre-ruling requests were submitted, as compared with 25 such requests in 2011. In addition, three requests for accounting pre-rulings submitted in 2011 were handled during 2012. Most of the accounting requests in the past year dealt with the following issues: independency; pro forma financial information; existence of significant influence; existence of control; changes in holding percentages of subsidiaries (including the question of loss of control and the possibility of recognizing revaluation profits); business combinations under common control; income recognition; treatment of financial instruments (including the need to separate embedded derivatives); determining functional currency; service concession arrangements; separate financial information; ISOX, etc.
3. Accounting and auditing enforcement decisions Decisions on accounting issues – In order to preserve the public’s confidence in financial reporting, the ISA continued to enhance its reviews of financial statements published by reporting companies. Following these reviews, the ISA issued accounting enforcement decisions detailing measures taken in cases of erroneous financial reporting. In 2012, the ISA’s staff published one enforcement decision on the subject of identifying and aggregating operating segments.
Decisions on auditing issues – the ISA’s staff attaches great importance to conducting adequate audits of the financial statements of reporting companies, and takes a number of steps to ensure that this goal is met.
52 As part of the ISA's ongoing review of financial statements published by reporting entities for the purpose of ascertaining that they meet the provisions of the law (including whether the financial statements have been adequately prepared and audited), the ISA’s staff encountered a number of cases where a company’s auditor did not meet the requirements of his profession, particularly those of auditors of financial statements of reporting entities.
In such cases, the ISA’s staff confronts the entity in whose financial statements such lapses were found. The staff takes action against the company’s auditor, according to the nature of the faults. In addition to the action taken against individual companies, the ISA’s staff brings some of the cases to the attention of the public, including publishing enforcement steps taken regarding them. This is done in light of the importance of fair disclosure and transparency and the ISA’s adherence thereto.
In 2012, the ISA's staff published one enforcement decision regarding testing for the going concern assumption underlying the preparation of financial statements as well as drawing attention to concerns about the assumption.
4. Special projects in 2012 begun in previous years a. Project of Improving Financial Statements In 2010, The ISA launched the Reporting Improvement Project with the aim of improving the reporting practices of reporting companies so as to render reports more relevant and useful to the public for the purpose of making investment decisions. The project’s key points were published for public comment in 2011 (as detailed below). In addition, the ISA’s staff intends to issue, during 2013 a draft amendment to the Securities Regulations, applying all principles of the project.
The Project includes, inter alia, modification of the reports’ format so that each chapter contains disclosure requirements with a similar or identical purpose; determining industry-specific disclosure requirements; clarification of the principles of materiality and reporting from management’s point of view; as well as establishing extensive disclosure provisions for aspects of corporate governance.
The new format The new format for financial statements will include four main chapters, according to the following order:
1. Management’s discussion and analysis report: This report will replace the existing board of directors’ report. Its purpose is to review, from management’s point of view, the state of the company’s business and strategy. The main changes regarding the board of directors’ report include a requirement to review the state of the company’s business (including its areas of activity), detailing the impact of developments in the company’s economic environment and its actions as regards the state of the company’s business and its performance. The report will be based on reviewed material information and the discussion and analysis brought before management or conducted by it. The management's report shall include disclosure regarding management’s strategy, expectations for the
53 next two years, material changes in the economic environment, and disclosure regarding the realization of forward looking information provided in the past.
2. Description of the company’s business report: (a) Industry–specific disclosure – following the Barnea Committee, which recommended the development of industry-specific disclosure requirements, and following changes in accounting standards, it was decided to develop specific disclosure requirements for various industries. During 2012, a draft amendment was published in the fields of natural gas and oil activities and investment property, which passes into law existing guidance on these issues. In addition, a proposed provision for a disclosure specific to life sciences was published. For further details on this issue, please see below, in Publications Pertaining to the Reporting Improvement Project.
(b) Financing and liquidity chapter – creation of a new sub-chapter in the description of the company’s business report, which integrates financing and liquidity risk aspects, in light of the lessons learnt from the latest financial crisis;
(c) Risk chapter – creating a new sub-chapter under the description of the company’s business report, which focuses on risk management (including operational risks and market risks), for the purpose of creating a comprehensive overview of risks and an inclusive, unified approach to handling them;
3. Financial information: This will include corporations' financial statements and additional financial information which should be included in the statements, such as separate financial statements, financial statements of associates and of companies which are beneficiaries of guarantees, where required, pro forma financial statements, etc.
4. Corporate governance report: In light of the ISA’s experience, as well as comments and insights provided by various capital market players, it was decided to create a corporate governance report, which will form an integral part of periodic financial statements. The ISA believes that a separate corporate governance report, which includes disclosure provisions and specific principles on this issue, would provide users of financial statements with an adequate platform for evaluating – as part of the price of a security – the quality of corporate governance in a corporation, and would indirectly encourage corporations to improve the quality of their corporate governance. According to a draft legislative outline, which was published for public comment in February 2011, a corporate governance report is to include six parts: (a) details regarding company officers; (b) transactions with controlling shareholders; (c) compensation of principal shareholders and senior officers; (d) effectiveness of internal control over financial reporting and disclosure (ISOX); (e) auditor; (f) a corporate governance questionnaire.
54 Regarding the issue of corporate governance questionnaire – In the first phase and until the entire issue passes into law, the ISA has decided to promote this key component from the draft legislative outline, by issuing a disclosure directive. The latter was published on September 12, 2012.
The disclosure directive included a structured questionnaire to be attached to each periodic report (beginning from the 2012 annual report). It includes questions divided into the main issues relevant for corporate governance, including: The board of directors’ independence; qualifications and skills of board members; board meetings and separation between the roles of the CEO and chairman of the board; the role of the audit committee in regards to financial statements and its work leading up to their approval; financial statements' auditor and transactions with principal shareholders.
In the first phase, the questionnaire will focus on applying the requirements of the Companies Law. The questionnaire is structured so that a “true” answer on all questions constitutes an indication that proper corporate governance is in place, and vice versa. However, it should be noted that some issues are dealt with through short open questions, where more information is to be provided.
In the first phase, until the aforesaid corporate governance report comes into effect, the questionnaire is to be attached to the Additional Information about the Corporation chapter in the annual financial statements and will apply to any publicly traded company. In addition, public companies shall be exempt from providing certain disclosures detailed in the disclosure provision, since it provides such disclosures in the questionnaire.
During 2012, prior to the questionnaire coming into effect, several early- adopting companies have already published the questionnaire, with the ISA’s staff encouragement.
Publications pertaining to the Reporting Improvement Project:
To date, as part of the project, the ISA's staff published a number of disclosure directives and draft legislative outlines on various issues:
a. Investment property – in December 2012, a regulations proposal for passing into law the disclosure directive on this issue;
b. Natural gas and oil – In 2012, a regulations proposal for passing into law the disclosure directive on this issue;
c. Entrepreneurial properties – in April 2012a second draft directive on this issue was published;
d. Life sciences – in October 2012, a draft directive for specific disclosures was published on this issue;
e. Corporate governance questionnaire – in September 2012, a draft directive was published on this issue;
f. Risk factors – in April 2011, a draft legislative outline was published on this issue;
55 g. Financing and liquidity – in May 2011, a draft legislative outline was published on this issue;
h. Solo reports – in June 2011, a draft legislative outline was published on this issue;
i. Management’s discussion and analysis report – in June 2011, a draft legislative outline was published on this issue.
The following is a list of the key disclosure directives published during the reporting year and how they were handled:
1. Investment property – in January 2011, the ISA published a directive for investment property companies regarding reporting policies for this industry.
The directive includes a new reporting format, which makes more extensive use of tables, thus facilitating the reading of annual reports and extraction of data thereof.
In 2012, the ISA staff developed the directive into regulations. The draft regulations were published for public comment and the staff conducted meetings with market players regarding the draft. The latter is currently at an advanced stage of legislation.
2. Entrepreneurial property – after the ISA published a draft of the directive for public comment in July 2010, it published – in March 2012 – a second draft, which includes the changes adopted, inter alia, following public comments on the first draft and in light of the ISA’s experience following the implementation of the investment property disclosure directive. Another draft – in which the adopted changes were highlighted – was published for another round of public comments, following which the staff continued to update and improve the disclosure directive draft – including simplifying some of the disclosure requirements it includes.
3. Natural gas and oil – in March 2011, the ISA published a directive for natural gas and oil companies as regards reporting policies for the industry. In 2012, the ISA staff developed the directive into draft regulations and published a draft thereof for public comment. The ISA staff conducted meetings with market players regarding the draft, which is currently at an advanced stage of legislation.
4. Life sciences –In October 2012, the ISA published for public comments a draft disclosure directive regarding companies in this industry.
The life sciences industry is characterized by high risk, which requires investors to have a broad knowledge base and deep understanding in order to price the economic value of securities issued by companies in this industry. Thus, since existing law provisions are unsuited for life science companies, but rather to industrial companies which are markedly different from life science companies' business model, the draft disclosure directive was published for public comment.
56 This purpose of the directive, which will apply to all companies whose main business is research, development, manufacturing and marketing of medical products (whether drugs or medical devices), is to simplify reporting and increase relevance, comparability (among companies and periods) and certainty of reporting and disclosure principles provided by life science companies in prospectuses, periodic reports and immediate reports.
Such improvement will be achieved, inter alia, by reducing redundancies, conveying information through tables, in a concentrated manner, improving the relevance of information items, defining disclosure requirements in immediate reports on special issues, etc. Thus, for example, according to the draft directive, companies shall be required to prescribe a reporting policy regarding various types of events whose occurrence requires immediate reporting; uniform rules for immediate reports on various issues were prescribed; companies shall be required to publish budgetary plans for a period of twelve months following the date of the prospectus or annual report, as is the case, in order that investors be assured that the company is capable of meeting its development plans, etc.
5. Abridging of financial statements –besides promoting legislation for the purpose of improving the understandability and quality of disclosure of financial statements as mentioned above, the ISA is working towards improving the quality of reporting under existing regulatory provisions. Thus, in 2011, the ISA issued a call to the public to express their views regarding the length and complexity of financial statements and propose solutions for the problem. In December 2012, after considering the public comments and conducting meetings with various players who prepare or use the reports, the ISA published an SLB on the issue.
As part of the ISA's role to preserve the interests of the investing public, it attaches great significance to simple, relevant and reliable reporting. In its SLB, the ISA announced it expects corporations and all entities relevant to the reporting process to do their best in order to uphold the necessary procedures so as to ensure that their reports meet these criteria.
In an effort to facilitate the process for reporting corporations, a long list of examples and implementation suggestions was added to the opinion. In addition, the ISA invited reporting corporations to enlist the ISA's help in solving various problems. In addition, the SLB stated that the ISA staff intends to focus on improving financial aspects in this respect in its ongoing reviews of reports and prospectus drafts and continue to assist all reporting corporations by additional publications which would include concrete implementation suggestions.
b. Underwriting In the past few years, offerings of securities have been made mostly without underwriters’ commitment. As a result, such offerings are conducted without an underwriter being responsible, inter alia, for misleading details in prospectuses. On the other hand, during this time, the significance of gatekeepers outside
57 corporations has become all the more evident. As a result, over the last year, the ISA published an extensive outline concerning proposed legislative amendments in underwriting and adjoining fields, mainly for the purpose of reinforcing the position of underwriters and reinstating underwriters as gatekeepers of securities offerings. During the year, the ISA received public comments regarding the outline and conducted meetings and discussions with various entities in the capital market. The ISA staff is currently developing draft amendments for the Law and Regulations, in order to pass these proposals into law.
c. Corporate governance – Amendments 17 and 20 to the Companies Law During the past year, a number of amendments to the Companies Law on the subject of corporate governance became effective: Companies Law (Amendment 17) of 2011
Amendment 17 (hereinafter – Amendment 17) was published in August 18, 2011, and became effective in February 2012. The Amendment deals with applying corporate governance principles to companies offering bonds only, which are similar to the principles which apply to public companies, mutatis mutandis. The Amendment follows Amendment 16 to the Companies Law -- which became effective in 2011 -- whose purpose was to render corporate governance in public companies more efficient and adjusting it to the current circumstances in Israel and to accepted principles in this field worldwide.
Following the introduction to Amendments 16 and 17, the Corporate Finance Department is examining their possible ramifications and adjusting disclosure provisions. For more information, please see Section 1.d regarding supervision of transactions with controlling shareholders.
Companies Law (Amendment 20) of 2011
Amendment 20 (hereinafter – Amendment 20) was published in the Official Gazette on November 12, 2012 and most of its provisions became effective on December 12, 2012. The Amendment complements Amendments 16 and 17 and was approved due to the fact that the compensation of senior officers in public companies is deemed by the legislator as unreasonable and discriminatory. The Amendment is based, inter alia, on the recommendations of a committee headed by the former Minister of Justice, Prof. Yaacov Ne'eman, and its purpose is to promote a hierarchal decision making structure in reporting corporations regarding compensation of senior officers who are not controlling shareholders or related thereto, while structuring the approval procedure by the relevant organs.
The Amendment includes three new requirements: to establish a compensation committee as part of the board of directors, which would be structured so as to ensure its independence regarding compensation issues in the company; to determine a compensation policy which would take into account principles outlined in the Amendment, which takes a long term view of the relationship between officers' performance and their compensation; to approve compensation policies and tenure conditions which take into account the position of shareholders from among the public, and in special cases even grant them the right to veto management's decision.
58 After Amendment 20 became effective, materially changing former practice, the Department staff issued disclosure provisions and SLBs on the issue, which reflect its positions on issues regarding the implementation of the Amendment.
d. Turnaround and arrangements procedures – Amendments 18 and 19 to the Law During the past year, a number of amendments to the Companies Law on the subject of Turnaround and arrangements procedures became effective:
Companies Law (Amendment 18) of 2011
On July 17, 2012, Amendment 18 (hereinafter – Amendment 18) was published in the Official Gazette, after having become effective on August 30, 2012. The purpose of the Amendment is to deal with the unique problem of representation in companies which have issued bonds to the public, in situations where a company runs into economic difficulties and wishes to reach a compromise or settlement with its bondholders, likely to lead to material adverse changes in the debt's repayment terms. Amendment 18 addresses the problem of the large number of bondholders and the fact that the bonds are held through institutional investors, which makes it more difficult to develop effective debt settlements between such companies and their bondholders. The purpose of the Amendment is to assist both parties in conducting negotiations with each other and enable bondholders to reach an informed decision before approving debt settlement agreements by appointing an expert, as defined in the Amendment, when beginning negotiations between the company and its debt holders, who is to accompany the development of debt settlement agreements and provide his/her opinion on whether the settlement is favorable to bondholders, while weighing the alternatives.
After Amendment 18 became effective, the staff of the Corporate Finance Department is assessing its impact, including by obtaining responses from relevant players, such as corporations, trustees and institutionals affected by the Amendment, conducting discussions with them – in regards to key issues arising from the Amendment as well as questions arising from ongoing handling of companies reaching such agreements.
Companies Law (Amendment 19) of 2012
On July 17, 2012, Amendment 19 (hereinafter – Amendment 19) was published in the Official Gazette, coming into effect on January 17 2013. This Amendment deals with company turnarounds and its purpose is to pass into law a number of issues which have so far developed mainly in court rulings. The Amendment is intended to increase court supervision of struggling companies, inter alia by transferring control from the company's secured creditors to the hands of a turnaround professional; to reinforce the court's supervisory role; to provide a financing option for struggling corporations, giving full priority to new borrowings; to enable company officers to remain in office when a company goes into suspension proceedings.
At this time, the ISA's staff is examining the impact of the Amendment on its ongoing activity.
e. Amendments 50 and 51 of the Securities Law – Trustees
59 On August 8, 2012, Amendments 50 and 51 of the Securities Law were published in the Official Gazette, after having become effective on November 8, 2012. The Amendments reinforce the role and position of trustees in relation to debt certificates and explicitly establish their duty to supervise issuers and ensure that they meet their commitments.
Since Amendments 50 and 51 came into effect, the Corporate Finance Department has been examining the impact of the Amendments, including by receiving responses from corporations, trustees and institutionals affected by the Amendments, and conducting discussions with them. In addition, the Department's staff is working to promote the amendment of regulations required as a result of the enactment of Amendments 50 and 51.
f. Supervision of independent auditors (PCAOB) Financial statements constitute a significant part of the overall disclosure to investors. For this reason, inter alia, there exists a profession, the purpose of which is to independently audit the information contained in these statements. Various reasons, including flaws discovered in the work of auditors and the problematic system by which these auditors are paid by the entities they audit, have led most developed markets to the conclusion that an independent body should be established, the purpose of which would be to supervise the work of independent auditors auditing reporting companies. In 2012, a draft bill was published for public comments, whose purpose is to establish the legal basis for such a body. The proposed bill was drafted after examining practices in various countries and following numerous discussions with relevant capital market entities and government ministries. The legislation process is expected to proceed in 2013 following receipt of public comments and additional discussions with relevant bodies.
5. Special Projects begun in 2012 g. Disclosure directive – IFRS 9 In April 2012, a disclosure directive was published under Section 36a of the Securities Law of 1968, regarding disclosure of distributions in companies implementing IFRS 9 by way of early adoption. The new directive deals with a requirement of companies which have adopted IFRS 9 and chose to re-designate equity financial instruments to "other comprehensive income" (so that the results of the revaluation of such instruments would never be included in profit and loss) to provide disclosure regarding the balance of distributable profits as calculated prior to the adoption of IFRS 9. In addition, at each dividend distribution announcement date, such companies are required to provide disclosure regarding the grounds on which the board of directors established the existence of distributable profits, based on the purpose of the distribution tests prescribed by the Companies Law as well as disclosure regarding material information and assessments which contributed to the decision of the board to approve the distribution, including professional opinions, valuations and expected cash flow projections.
Prior to publishing the directive, the ISA staff initiated, together with the Ministry of Justice, a proposal for enacting Companies Regulations (Other Amounts Included in Equity Capital Considered as Surplus) of 2012 (hereinafter –
60 the IFRS 9 Regulations), pursuant to the power of the Minister of Justice under Section 302(b) of the Securities Law. The purpose of the Regulations was to prescribe provisions regarding the amounts to be considered as surplus for the purpose of distribution, so that the provisions of IFRS 9 are met as well as designating investments in financial assets to "fair value through other comprehensive income" will not lead to the distributable amounts being different that prior to the adoption of IFRS 9. In other words, if a company chooses to implement the alternative according to which equity financial instruments are re-designated to "other comprehensive income", so that the results of the revaluation of such instruments will never be credited to profit and loss, it should add or subtract to the balance of distributable profits the capital reserve recognized under equity capital following the adoption IFRS 9, had that reserve been recognized under profit or loss under the former accounting principles.
Around the time that the directive was published by the ISA, the Ministry of Justice published the IFRS 9 Regulations draft. If enacted, the ISA shall consider revoking the directive or adjusting it to the new provisions contained in the Regulations.
On July 11, 2012, the Knesset's Constitution, Law and Justice Committee approved the proposed amendment to the Companies Law, and the IFRS 9 Regulations were published in the Official Gazette, becoming effective immediately.
Due to the fact that the Committee approved the proposed IFRS 9 Regulations verbatim, resulting in the practice prior to the adoption of IFRS 9 remaining the same, the directive was no longer required, and was revoked in December 2012.
h. Updating of distribution tests The Companies Law prescribes two distribution tests – the profit test and the solvency test. The purpose of the profit test, in addition to the solvency test, is in line with the preservation of capital principle, in that the profit test allows a company to distribute only the value it has produced as a result of its business activities (which is in line with the concept that distributions should reflect the transfer of value created in the company to shareholders), thus providing creditors with a point of reference, which enables them to evaluate, at any point in time, what are maximum distributable amount is without court approval.
In order to define the surpluses underlying the profit test, the Law refers to the Israeli Accepted Accounting Principles (IAAP). International Financial Reporting Standards (IFRS) were first adopted in Israel in January 2008. The adoption of the IFRS in Israel had significant impact on the financial statements of some reporting corporations, due to the gaps between the provisions of the IFRS and IAAP. Thus, for example, there are many more cases where assets and/or liabilities are measured at fair value, with the changes in fair value recognized under profit or loss. In addition, new terms were introduced, such as "other comprehensive income", which were not in existence when the distribution test was first prescribed by the Companies Law.
61 Despite the material changes in accounting for profit following the adoption of IFRS, as aforesaid, the profit test, which is in line with the IAAP, has not been altered.
In light of the aforesaid, in 2012 the ISA's staff assessed the need to update the provisions of the Companies Law dealing with distribution, while emphasizing the impact of IFRS adoption on the profit test. As a result, the ISA staff recommended to the Ministry of Justice to promote a legislative amendment altering the distribution tests or their implementation.
i. Shelf prospectuses – the sample offering chapter The description of securities in prospectuses includes a lengthy description of all types of securities offerable under the provisions of the Law (including ISA SLBs and directives issued by the Exchange clearing house, as well the Exchange's Rules and Regulations). The purpose of this indiscriminate description is to meet the lawful requirement to provide an exhaustive list of all securities the corporation may issue under the shelf prospectus. Since the corporation has no idea what types of securities it will issue in the future (at the time it takes the securities "off the shelf"), shelf prospectuses detail all existing and possible securities.
One of the proposed exemptions under the regulatory exemptions paper, published for public comment in September 2012, is to revoke the requirement to describe the securities in the prospectus, which would instead be done as part of the shelf offering report.
Until such an amendment procedure takes place, and in order to facilitate the handling of requests for approval of prospectuses (hereinafter – approval requests), the ISA staff proposed, in cooperation with the Tel Aviv Stock Exchange, to add a new chapter to securities offerings in accordance to a shelf prospectus, so as to achieve standardization on this issue. This proposed version was published for public comment in March 2012.
In practice, most corporations indeed chose to include the proposed chapter in draft prospectuses filed with the ISA (and the Exchange) for approval and in the final, approved prospectuses. Such reviews are speedily completed by the ISA and Exchange staffs, which make corrections to the draft chapter.
j. Valuations – disclosure of interests Valuations may be useful to reporting corporations under many circumstances, mainly valuations for the purpose of financial reporting or transactions with principal shareholders. According to the Securities Regulations and various binding opinions issued by the ISA, corporations are required to include valuations beyond a certain level of materiality. It should be noted, the Accepted Accounting Principles and Securities Regulations do not require a valuer to be independent of the company for which it produces the valuation. Thus, for example, a valuation may even be conducted internally, by the Company’s employees. On the other hand, the question of the valuer's independence may affect many aspects of the valuation and its reliability. Thus, for example, according to Accepted Auditing Principles, for the purpose of auditing financial statements, an independent auditor needs to assess, inter alia, how objective (including independence criteria) the work of an expert valuer is, since it may
62 influence the scope of the audit evidence and assessments carried out by the valuer.27 Another example is to what extent the company's audit committee and board of directors – as well as its shareholders – relies on valuations used for professional opinions for the purpose of assessing transactions between a company and its controlling shareholders.
For the abovementioned reasons, when valuations are attached to a company's reports, the Securities Regulations require disclosure regarding independence between a company and a valuer producing a valuation for that company. If a dependency exists – its nature should be noted, in addition to an explanation why the valuer was preferred to other, independent, valuers. However, there are no existing tests or standards which clearly define the term "independence" regarding valuers, so that corporations and valuers are free to interpret the term as they please. By the way, this situation is different than that of auditors, for whom there are clear-cut independence tests.
For these reasons, the Israel Securities Authority began, during 2012, a project whose purpose is to regulate the criteria for independence of valuers. As part of this project, the ISA intends to define circumstances which may impair a valuer's independence. It should be clarified that the purpose of this regulation shall be to create a definition and criteria for the term "independence" regarding valuers, for disclosure purposes. However, as mentioned above, such regulation will not necessitate the use of independent valuers.
C. Enforcement
1. Financial sanctions
Chapter H3 of the Securities Law, which regulates financial sanctions,28 authorizes the ISA to impose financial sanctions on any person due to the violation of the provisions of the Securities Law and Regulations specified under Amendment 5 to the Law.
In accordance with Section 52o of the Law, a financial sanction shall be imposed on violators of any provisions detailed in Amendment 5 to the Law. The financial sanctions are collected by the ISA and transferred to the state treasury.
Table 13: Financial sanctions imposed during the past two years
Amount of financial sanctions Year No. of financial sanctions (in NIS millions) 2011 13 2.29 2012 12 1.01
The following is a list of violations for which financial sanctions were imposed in 2012:
27 See Sections 8-10 and the appendix of Audit Standard No. 96 of the Israel Institute of Certified Public Accountants regarding the use of experts' work. 28 Chapter H3 of the Securities Law regarding financial sections became effective on October 1, 2007.
63 Delinquent filing of financial statements; offering securities to the public under an unlawfully signed draft prospectus; effective offering of securities to the public other than by way of a prospectus (statements by company officers); failure to include highly material valuations.
Prominent cases where financial sanctions were imposed:
Carasso Motors Ltd. – During the company's IPO, it published public drafts of a prospectus which were not signed by a pricing underwriter. Thus, the company conducted a public offering while violating Sections 15(a) and 22(a) of the Law. As a result, the company paid a fine of NIS 390,000.
Delek, the Israel Fuel Corporation Ltd. – a newspaper item was published, which included statements by the company's CEO regarding material issues in the company, some of which were not yet disclosed to the public. Due to the nature and content of the CEO's statements, and since the company was in the process of obtaining a permit to publish a prospectus, the ISA determined that the item constitutes a public offering29 other than by way of a prospectus approved by the ISA. In addition, the company violated the provisions of the law by filing an "immediate report regarding an exceptional event or issue which may have significant influence on the price of the company's securities" after the information included in the report was already published. As a result, the company paid a fine of NIS 120,000.
Beit Shemesh Motors Holdings Ind. – On January 4, 2012, the company was fined for publishing an erroneous and misleading immediate report regarding the nomination date and beginning of tenure of one of its external directors. The company filed an appeal with the court against the ISA's decision. On August 8, the company's appeal was upheld by the Hon. Judge Ms. Ruth Ronen of the Tel Aviv District Court (Economic Department).30 The ISA appealed the District Court's decision to the Supreme Court.31
29 The newspaper item constitutes an action designed to motivate the public to purchase the company's securities. Thus, its publication constitutes an offering other than by way of a prospectus. 30 Administrative Petition (Tel Aviv) 30045–02–12 Beit Shemesh Motors Holdings Ltd. vs. Chairman of the Israel Securities Authority. 31 Administrative Petition Appeal 6999/12 Chairman of the Israel Securities Authority vs. Beit Shemesh Motors Holdings (1997) Ltd.
64 V Investment Department 1. Mutual Funds
a. General
As of the end of 2012, the number of mutual funds stood at 1,277, all of which were open-end funds, with one fund in the process of liquidation. During the year, 91 new open-end mutual funds were created and75 ceased operations, 68 of which merged with other mutual funds and the rest were liquidated.
As of the end of the reporting year, there were 21 active mutual fund managers (two fund managers ceased operations during the year and one was added), as compared with 22 managers in 2011. As of the end of 2011, the number of active mutual fund trustees stood at five, with two additional trustees licensed to serve as mutual fund trustees but not serving as such. One fund manager has submitted a request for approval to serve as trustee but the request has yet to be approved.
During the year, the last fund manager under the control of banks was acquired, and the structural changes as a result of the legislation arising from the Bachar Committee's recommendations were finalized. The aim of the changes was to increase competition and decrease economic concentration and conflicts of interests in the Israeli capital market.
The average size of funds reached a peak in relation to the last few years, standing at NIS 133 million (close to the 2005 all-time high of NIS 135 million). The number of active funds remained almost unchanged (as part of efficiency processes taking place in the industry, which included mergers and liquidations of funds with low asset value). In addition, there was a significant increase in the total value of mutual funds under management.
The value of assets held by mutual funds as of the end of December 2012 stood at NIS 170.1 billion, as compared with NIS 142.3 billion as of the end of 2011 (see Table 14). On December 10, 2012, the total value of assets managed by mutual funds reached an all-time peak of NIS 170.9 billion. The increase in the value of assets (NIS 27.8 billion) arises mostly from excess originations valued at NIS 19.9 billion, as well as from capital gains valued at NIS 7.9 billion.
Table 14: No. of mutual funds and value of assets under their management in the past three years
Year No. of funds Value of assets Average fund size (in NIS billions) (in NIS millions) 2008 1,185 98.1 83 2009 1,202 133.2 111 2010 1,247 156.6 126 2011 1,261 142.3 113 2012 1.277 170.1 133
65 Under the provisions of Section 73(c1)(1) of the Joint Investment Law, mutual funds must be classified in publications in accordance with provisions set forth in the Regulations by the Minister of Finance. A list of defining titles for classification purposes is published on the ISA website. The following table includes data as of 2012 year end.
Table 15: Statistics on mutual funds, by class, for 2012
No. of funds (as of Value of Average fund Percentage Class (by main December assets (in size (in NIS of fund title) 31, 2012) NIS millions) millions) assets
Flexibility 21 910 43.3 %0.5
Foreign – general 1 63 63.0 0%
Israeli stocks 134 4,916 36.7 %2.9
Foreign stocks 96 2,956 30.8 %1.7
Leveraged & 922 51.2 %0.5 strategic 18
Money market fund 41 35,682 870.3 %21
Israeli bonds – NIS 243 34,370 141.4 %20.2
Israeli bonds – gov't 166 32,853 197.9 %19.3
Israeli bonds – 261 32.6 %0.2 foreign currencies 8
Israeli bonds – 23,753 115.6 %14 corporate & convertible 205
Israeli bonds – 25,075 103.6 %14.7 general 242
Foreign bonds 65 5,539 85.2 %3.3
Mixed 2 103 51.5 %0.1
For non-Israelis 67 13.4 %0 only 5
Fund of funds 30 2,558 85.3 %1.5
Total 1,277 170,028 %100
66 Chart 1: Asset value in the past two years as a percentage of total funds, by funds' class
b. Permits to hold means of control in fund managers and licensing of fund managers and trustees
Permit applications are handled pursuant to the Permits to Hold Means of Control in Fund Managers and Licensing of Fund Managers Procedure, available on the ISA website. Eight32 applications for permits to hold the means of control in a fund manager were handled and approved during the reporting year, as well as one application for permit to serve as fund manager.
Permit applications are handled pursuant to the Mutual Fund Trustee Approval Procedure, which is also available on the ISA website. During the reporting year, two applications for permits to function as mutual fund trustees were submitted, one of which was approved.
c. Prospectuses
Granting permits to publish prospectuses The prospectus of an open-end mutual fund remains valid for a period of up to twelve months from the date of publication. In order to ensure continuity in the offering of mutual fund units to the public, fund managers must publish a prospectus at least once a year.
32 The number of permits was greater than in the past, since holders of single fund managers tend to submit a joint permit application. The permits, however, are personal and granted separately to each holder.
67 In 2012, 1,304 permits to publish prospectuses were granted, 91 of which were for prospectuses of mutual funds offering their units to the public for the first time (as compared with 1,302 permits in 2011, of which 80 were for mutual funds offering their units to the public for the first time). In addition, permits were granted for the publication of 22 prospectuses for fund managers (Part B of fund prospectuses).
The reporting gaps project – in 2010, the Joint Investment in Trust Regulations (Details, Structure and Form of a Fund Prospectus) of 2009 (hereinafter – the New Prospectus Details Regulations), under which the format of funds' prospectus was altered, as was the Joint Investment in Trust (Reports) Regulations of 1994 (hereinafter – the Reports Regulations), which detail events requiring fund managers to issue reports thereof.
Since the New Prospectus Details Regulations were drafted in different periods, and since the New Prospectus Details Regulations include changes which reflect developments which occurred in the capital market after the Reports Regulations became effective and before the New Prospectus Details Regulations became effective, there was a need to re–examine reporting requirements, inter alia, the need to report information which has undergone changes during the prospectus period as well as the need to reduce the volume of reported information.
The staff assessed gaps between information reported in prospectuses and that which is reported in immediate reports. Its recommendations will be expressed in amendments to the New Prospectus Details Regulations and Reports.
d. Regulations
(i) During the reporting year, there has been a significant decrease in the number of reports published by fund managers. In 2012, 27,634 reports33 were published (as compared with 33,174 reports34in 2011), as follows:
27,255 reports required of mutual fund managers under the Law and Regulations (as compared with 32,758 in 2011).
(ii) 379 reports required of mutual fund trustees under the Law and Regulations (as compared with 416 in 2011)
(iii) During the year, new reporting forms were added: S028 – Report on Nomination of an Internal Control Supervisor; S029 – Report on End of Tenure of an Internal Control Supervisor; S099 – Report on Plan to Merge Funds; and S216 – Announcement Regarding Results of a Tender for Securities Agents.
e. Participation of mutual fund managers in general meetings.
33 The number pertains only to public reports (reports issued to the public) and does not included non–public reports. 34 Reporting of separate events in a number of funds consolidated in one form for the sake of convenience is counted as a number of reports.
68 Section 77 of the Law requires fund managers to participate and vote in general meetings of a corporation whose securities are held by their fund, if the meetings are called to approve motions that may harm the interests of unit holders, including approval of interested party transactions, and motions that may favor the interests of unit holders.
Section 77(c) of the Law requires fund managers who participated in such general meetings to file a report with the ISA and Stock Exchange regarding their votes at the meeting.
Table 16 below includes data regarding the participation rate of fund managers in general meetings in which they are required by law to participate and vote.35
Table 16: Participation rate of fund managers in general meetings in which they are required by law to participate and vote, in the past five years Year No. of Participation by less Participation by 30% Participation by more meetings than 30% of to 70% of managers than 70% of managers managers No. of Rate No. of Rate No. of Rate meetings meetings meetings 2008 548 57 %10.4 145 %26.5 346 %63.1 2009 705 91 %21.9 212 %30.1 402 %57.0 2010 1,005 20 %2.0 135 %13.4 850 %84.6 2011 865 55 %6.4 78 %9.0 732 %84.6 2012 670 22 %3.3 55 %8.2 593 %%88.5
35 In the absence of data regarding Securities held by mutual funds during the course of a month, the assumption was that if a fund held the security at the end of the previous month for the purpose of determining participation in the general meeting, as well as at the end of the month in which the general meeting was held, constitutes holding the security at the date of the general meeting. In addition, it was assumed that a meeting in which at least one fund manager took part is one in which other fund managers are required to participate in and that meetings summoned using the T133 MAGNA forms (Report of a Transaction with a Controlling Shareholder) and T138 (Report of a Private Offering) – included at least one motion which required the fund manager holding the securities of that company to participate and vote.
69 Chart 2: No. of trust funds in the past five years
Chart 3: Asset value of trust funds in the past five years (in NIS billions)
f. Onsite audits of mutual fund managers
During 2012, the ISA audited mutual fund managers as follows::
(i) Field audits – Six field audits of mutual fund managers were conducted by Investment Department staff members and outsourced auditors. The audits focused on investment policies and the control environment.
(ii) Fund managers were required to report to the ISA regarding the implementation of recommendations issued following audits conducted in by the ISA in 2011;
(iii) Cross sectional audits (by correspondence):
70 (1) The ISA began a cross sectional audit in all mutual fund managers, focusing on brokerage and maintenance. (2) A cross sectional audit was conducted in fund managers regarding compensation of unit holders. The audit, which began in 2011, was completed during the reporting year. (3) A cross sectional audit regarding the scope of internal auditing was conducted in fund managers. (4) A cross sectional audit of coordinated transactions in Exchange Traded Notes (hereinafter ETNs) for funds under their management. (iv) The Department conducted audits of fund managers' securities activities through analysis of irregular transactions, entity-specific audits and subject– specific cross-sectional audits.
g. Supervision of mutual fund trustees
As part of the overall reinforcement of its supervision over mutual funds. The ISA:
a. Conducted visits in trustees’ offices, in which the ISA staff reviewed various aspects of trustees’ activities. These included demonstrations of systems and modes of operation employed by the trustees, etc. b. Updated the MAGNA form used for reporting trustees' quarterly opinions regarding the system used by fund managers; c. Reviewed various aspects of trustees' eligibility, including upholding independence and lack of conflict of interests throughout their activity; d. Assessed trustees' reaction to lapses by fund managers;; e. Performed both broad– and spot reviews of trustees to examine various issues which arose during routine supervision of fund managers'; f. Followed–up on trustees' quarterly reports in their new format; g. Cooperated with the Association of Trustees on various issues.
h. Regulatory activities
(i) Staff and plenum bulletins
The Investment Department issues staff bulletins, in which it states its opinions as regards interpretations of statutory provisions on general matters pertaining to certain entities or to the market in general. These bulletins concern statutory provisions which, in the Investment Department's opinion, are not sufficiently clear, require additional clarification, or are general in nature and therefore require specification. In addition, the Department staff publishes circulars with the aim of providing guidelines as to the implementation of the law and directives which apply to supervised entities. During the reporting year, the staff published three staff bulletins for fund managers and/or trustees on various issues.
(ii) Pre-rulings
71 The Investment Department receives pre-ruling inquiries, usually by supervised entities, seeking the ISA's position on the implementation of statutory provisions in certain forward-looking cases. Furthermore, the Investment Department receives no–action requests due to deviations from statutory provisions in certain forward-looking cases. As of July 1, 2007, such requests are subject to the ISA's pre-ruling procedure, which appears on the ISA website. In addition, the ISA accepts general requests to clarify its position on interpretations of various legal issues. During the reporting year, 21 pre-ruling requests concerning the Joint Investment Law were received by the Investment Department. The inquiries and answers thereto can be accessed on the ISA website.
(iii) FAQs
During the reporting year, the ISA staff continued to publish, on an ongoing basis, FAQs addressed to it by supervised entities in the mutual funds sector on various issues, with the aim of increasing transparency vis a vis supervised entities and clarifying the legal environment in which they operate.
(iv) Annual meetings with fund managers
This year, the ISA staff began to conduct annual meetings with fund managers, in order to deepen their knowledge thereof and maintain an ongoing dialogue with them. Many issues raised in these meetings found their way to the Regulatory Exemptions paper included in the ISA's Roadmap.
i. Enforcement measures concerning fund managers
Civil fines
Civil Fines Under Section 114 of the Law,36 violators of any of the provisions of that Section are subject to civil fines. The ISA collects the fines and transfers them to the State Treasury. Section 117(b)(2) of the Joint Investment Law grants the ISA the authority to waive fines on violations of Sections 114 and 115 of the Law in specific exceptional cases.
During the reporting year, the ISA imposed fines on three fund managers.
On February 17, 2011, the Securities Regulations (Reduction of Financial Sanctions) of 2011 (hereinafter – the Reduction Regulations) went into effect, which authorize the ISA to reduce civil fines for causes prescribed in the Regulations and by percentages detailed therein. In 2012, the ISA exercised its aforementioned authority in three cases (please see table 17 below).
Table 17 details, inter alia, the types of violations for which fines were imposed during the reporting year:
Table 17: Violations for which fines were imposed in 2012 and fine amounts
36 The abovementioned sections preceded the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments) of 2011, and were subsequently amended on February 27, 2011.
72 Violation for which fine was imposed Sections violated in Joint Fine imposed Investment Law 1. Violation of Section 60 of the Law: conducting a Section 114(b)(10a) of the NIS 43,200 transaction outside the Exchange by a fund manager Law without preapproval by fund manager's board of directors or its committees.
2. Violation of Section 73(b) of the Law: Presenting rate of Section 114 of the Law, part NIS 62,500 return data in violation of the provisions of the Law b, sub-section 21 of regarding calculation and publication of returns. Amendment 1 to the Law37 3. Violation of Section 73(a) of the Law: Publication of Section 114(b)(16)(a) of the NIS 64,800 information regarding the fund in the media, without Law preapproval by the fund trustee, in violation of the provision requiring approval prior to any publication by a mutual fund.
2. Exchange Traded Notes (ETNs)
a. General In 2012, five groups of issuers were active in the Exchange Traded Notes (ETN) sector, with each issuer including a number of companies, following two mergers between issuers which took place in 2011 (the Tachlit Group merged with the Index Group, and the Meitav Group – with the Mabat Group). During 2012, the newly formed Dash Apex and Meitav group requested approval to merge their ETN activities as well, but the Antitrust Authority denied their request.
By the end of the year, the number of ETNs reached 464, as compared with 459 ETNs at the end of 2011.
Chart 4: No. of ETN Series in the past five years
37 The sections mentioned in this violation are in accordance with the Law after the Streamlining of ISA Enforcement Procedures Law came into effect in 2011.
73 The value of public holdings of ETNs reached NIS 68.9 billion as of the end of 2012, as compared with NIS 56.8 billion as of the end of 2011, an increase of approximately NIS 12 billion (21.3%). This increase arises mainly from an increase of NIS 7 billion in deposit certificates issued from the beginning of 2012, approximately NIS 4 billion in other certificates and as a result of an increase in index rates.
Chart 5: Value of public holdings of ETNs in the past five years
b. Prospectuses The ETN market is comprised of a small number of issuers. In order to answer market demand in real time, issuers make wide use of shelf prospectuses, which enable them to offer the public and list ETNs for trading within a short period of time. The main advantage of a shelf prospectus is that following its approval, an issuer may issue the products included in the prospectus without the need to obtain additional approval by the ISA. The offering can therefore be made within a very short period of time – even a few days
During 2012, the ISA approved one new shelf prospectus, as compared with seven such approvals in 2011. The low number of requests for approval stemmed from the fact that most companies issued shelf prospectuses in 2011 and prospectuses are valid for a period of two years from their issue dates. It should be noted that as part of its proposals for regulatory exemptions included in the ISA's Roadmap paper, it is considering extending the period of prospectuses to three years, so as to streamline the companies' ongoing issues.
In 2012, three amendments were made to shelf prospectuses, as compared with seven such amendments in 2011. It should be noted that 19 shelf offerings were published during 2012 under shelf prospectuses, as compared with 40 such offerings in 2011.
When reviewing prospectuses, the Department’s staff examined, inter alia, the following: economic summaries of ETN series; the scope of disclosure provided for new indexes; disclosure regarding credit risk, market risk and public holdings
74 of financial instruments; disclosure regarding ETNs' exposure profile. In addition, the staff reviewed issues regulated in trust deeds of ETN series.
c. Reports ETN managers report to the public and the ISA in accordance with the Securities Law, its regulations, and specific disclosure requirements concerning information on ETN series which have been issued to the public. The Department staff followed up on the reports, examining whether the companies meet their disclosure requirements. The Department staff examined, inter alia, annual, quarterly and immediate reports, as well as prospectuses and shelf offerings. In addition to these reports, ETN firms publish specific reports for this field, 38such as:
(i) A daily report regarding details for the valuation of ETNs and indexed products (Form T124) – a report published daily, prior to the beginning of trading, by each ETN firm. The report includes information for the purpose of evaluating ETNs.
(ii) A monthly report regarding credit risk exposure (form T203) – the report includes data on managing entity–level and issuer–level credit risk exposure,39 for every ETN series, with details about the nature of exposure to each credit risk source (deposits, notes, derivatives, lending of securities, ETNs, etc.);
(iii) A monthly report regarding public holdings (Form T204) – detailing the value of public holdings for each ETN series and total for all series of the issuing company and managing firm.
During 2012, ETN managers filed 6,269 reports (as compared with 5,517 reports in 2011 and 5,833 reports in 2010).
Chart 6: No. of reports filed by ETN managers in the past five years
38 It should be noted that companies issuing structured products are also bound by some of these reporting requirements. 39“Managing body” refers to ETN managers, i.e. – to an investment house holding a number of ETN issuers.
75 76 d. Regulatory activities
(i) Pre-ruling requests
In 2012, the Department staff handled four requests for pre–ruling, as compared with one such request in 2011. Requests for pre–rulings and answers thereto are published on the ISA website.
(i) Disclosure directives During the reporting year, the Department staff published two disclosure directives:
(1) Disclosure directive regarding names of ETNs
The directive determines uniform rules for naming ETNs, since names are used to identify funds, and thus, if they are inaccurate or lack material information, the public may be misled and may incur damage.
(2) Disclosure directive regarding valuations of ETNs and comparison between their returns and those of the tracked index
The purpose of the directive is to provide uniform rules so as to allow comparison between ETN returns and those of their tracked indices, as a result of the various conversion formulas and backing means used by each ETN or issuer.
(ii) FAQs During the year, the Department staff published on its website, for the first time, a set of FAQs dealing with various issues handled by the Department.
e. New legislation initiatives regarding ETNs
ETNs are currently issued as bonds, with issuers adhering to bonds' disclosure requirements. In accordance with the Securities Law. In the past few years, the ISA has been initiating a significant reform, with the purpose of regulating the field under the Joint Investment Law, similarly to trust funds. Thus, this year the ISA prepared amendments and exceptions so as to refrain from unneeded changes in the activity of ETN managers prior to moving to regulation under the Joint Investment Law.
(i) Amendment 50-51 to the Securities Law regarding debt certificates – due to request by ETN issuers, the Department staff drafted changes to the Law. Such adjustments included excluding ETN issuers from the requirement to make deposits with their trustee in order to secure repayment of special expenses incurred by trustees, due to the high capital requirements for ETN issues in relation to other debt certificate issuers, as well as adjusting the trustee nomination mechanism for ETNs, so that nominations be made by the company on a regular basis rather than be subjected to holders' votes on their first meeting.
(ii) Amendment 17 to the Companies Law – According to this Amendment, ETN issuers are defined as "bond companies", and are subjected to more severe corporate governance requirements. Since all ETN managers (i.e. –
77 investment houses) work through a number of issuers, adjustments were required to the composition of audit committees and external directors were allowed to serve as such in all ETN companies of an ETN manager at the same time.
(iii) Amendment 20 to the Companies Law – this amendment sets rules regarding the manner in which officers' compensation in publicly traded companies and bond companies are to be approved. Following the request of ETN managers, exemptions were granted regarding the composition of compensation committees and determining compensation policies.
f. Increasing ongoing disclosure
During the reporting year, the ISA staff increased requirements for disclosure and development of control mechanisms, as follows:
(i) On October 9, 2012, the ISA published SLB 107-05 entitled Principles for Regulating the Activity of ETN Issuers in Swap Transactions. Until those principles are anchored in regulations – as part of the reform promoted by the ISA to place the ETN field under the Joint Investment Law – the Department’s staff requires ETN firms to issue reports regarding whether they meet these provisions or their reluctance to do so in accordance with the published principles, under the “adopt or disclose” principle. In 2012, all issuers reported adopting the swap model principles in accordance with said SLB.
(ii) ETN companies currently report through reporting forms designated for reporting corporations. As part of the preparations for the enactment of Amendment 21 to the Joint Investment Law, which will regulate the ETN field, the staff developed specific MAGNA forms for the ETN field, so as to provide the public with easier access to information reported by ETN firms.
(iii) In July, ETNs first began reporting data required for daily valuations of their issued ETNs (Form T124) and the monthly report regarding public holdings (Form T204) using TXT files, in addition to ongoing reporting using PDF files. Such reports began after a pilot period, during which the staff collaborated with issuers and information providers for the purpose of improving the presentation of data. Since official reporting began, a number of updates have been introduced to the reporting files, which have been published on the ISA's website. TXT files can be read by IT systems, thus enabling the public at large, investment advisors, and information providers easy access to data and an ability to process and use them. Thus, reports and inquiries have been developed in the ISA's IT systems, and the staff began to develop additional processes for input processing of reported details.
g. Audits of ETN managers
During 2012, the ISA audited one ETN manager, focusing on risk management. The said audit was the last of a series of risk management audits which began in 2011, thus wrapping up such audits in all ETN managers.
During the year, Department staff members followed up on recommendations of audits conducted in past years. The follow up yielded that most recommendations were fully implemented by ETN managers.
78 h. ETN trading In 2012, the Department's staff was engaged in promoting a reform for the ETN sector, with the aim of enabling the public to purchase and sell ETNs at a price closer to the value of their tracked assets. As opposed to trust funds, where a unit can be created and redeemed in accordance with the value of its assets as of the end of the trading day, an ETN is a traded product which can be purchased and sold during trading. Following discussions with the ETN Union and the Stock Exchange, the ETN Union developed an outline proposal which is expected to introduce a significant improvement to ETN trading, which was submitted to the Stock Exchange. The outline deals with improving market making during trading and removing barriers for creation and conversion of ETNs outside trading. If approved, the outline is expected to be implemented in 2013.
i. The Exemption Proposal Project under the ISA's Roadmap plan
As part of the project, the Department's staff met with ETN managers, as well as with other capital market players in order to develop a list of exemptions, which were included in the Exemption Proposal Project under the ISA's Roadmap paper.
3 Investment advisors, investment marketing agents and investment portfolio managers
a. General
As of the end of the reporting year, there were 5,122 licensed individuals (924 of whom were portfolio managers, 3,572 were investment advisors, and 626 were investment marketing agents).
Table 18: Total no. of licenses granted to individuals – portfolio managers, investment advisors and investment marketing agents in the past five years Year Portfolio Investment Investment marketing agents managers advisors
until 2008 1805 5822 653 2009 212 365 151 2010 162 198 179 2011 152 248 144 2012 138 274 161 Total no. of licenses 2,469 6,907 1,288 granted
Table 19: No. of license applicants added each year in the past five years
79 Year No. of License Applicants
2008 2,605
2009 2,060
2010 2,875
2011 2,455
2012 1,972
Licensed Companies
As of the end of the reporting year, there were 173 licensed companies (of which 134 were portfolio management companies, 11 were investment advice firms, and 28 were investment marketing firms).
The following are details regarding the value of assets under management by licensed portfolio management companies as of December 31, 2012. The data are based on reports submitted by companies according to Section 27(a) of the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law (hereinafter – the Investment Advice Law) and Regulation 8 of the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Equity and Insurance) of 2000.
Chart 7: Total value of assets under management by portfolio management companies in the past five years40 (in NIS billions)
Chart 8: Value of managed assets for institutional and private investors for portfolio management companies as of December 31, 2012
40 All data regarding the value of assets were taken from reports filed with the ISA by portfolio management companies.
80
As of December 31, 2012, the value of portfolios whose majority of assets (more than 50%) are invested in mutual funds constitutes 7% of the total value of managed assets.
b. Licensing
During the year, 573 licenses were issued to individuals (138 to portfolio managers, 274 to investment advisors, and 161 to investment marketing agents). Furthermore,, 14 licenses were issued to companies (five to investment portfolio management companies, seven to investment advisory firms, and two to investment marketing firms).
24,464 individuals are currently at various stages of the licensing process, of whom 6,599 are pending licensing as retirement fund advisors.41
During the reporting year, licenses of 18 companies were revoked, upon their request, inter alia: 11 portfolio management companies, five investment advisory firms, and two investment marketing firms. In addition, the ISA is currently taking steps to revoke a portfolio management company's license due to reliability issues.
(i) Exams
As part of the licensing of investment advisors, investment marketing agents and investment portfolio managers under the Investment Advice Law, two exam sessions were held in 2012 – in May/June and November/December – on the following subjects:
a. Securities laws and professional ethics;
41Such licenses are granted by the Ministry of Finance, but license applicants are required to pass four of six licensing exams conducted by the ISA.
81 b. Accounting; c. Statistics and finance; d. Economics; e. Professional A f. Professional B (for those seeking investment a portfolio manager license). 7,485 exams were held for 5,968 examinees, of whom 3,152 passed (see Table 20 below).
Chart 9: No. of licensing examinees (by no. of exam units) in the past five years
Table 20: Exam success rates in 2012 Subject No. of Examinees Annual success rate (%) Professional ethics 1 100 Securities laws and professional ethics 1,042 78 Accounting 829 36 Statistics and finance 931 43 Economics 969 49 Professional A 1,891 62 Professional B 534 51
Exemption from exams
The Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Services Regulations (Application for License, Examinations, Internship and Fees) of 1997 (hereinafter – the Licensing Regulations) specify that candidates holding a relevant degree, within the meaning thereof under the Licensing Regulations, are entitled to exemptions from the three basic exams: economics, accounting, as well as statistics and finance. During the reporting year, 3,097 applications for exemptions were processed, of which 2,953 were approved.
82 Chart 10: Processing of exemption applications in the past five years
(ii) Internship
The abovementioned Licensing Regulations also regulate the compulsory internship for all applicants. During the reporting year, 436 internship applications were approved, of which 194 were for investment advising, 94 for investment marketing, and 148 – for portfolio management.
Chart 11: Processing of internship applications in the past five years
(iii) Foreign Service Providers Registry
During 2012, two foreign service providers were registered in the Foreign Service Providers Registry along with two licensed corporations.
(iv) Requests handled by the committee authorized under Section 8a of the Investment Advice Law
The committee authorized by the ISA to provide licenses under Section 8a of the Investment Advice Law, discussed 15 cases regarding the following issues: exemptions from examinations, partial or full exemption from internship; and recognition of leave days during internships.
83 (v) Handling credibility of license holders
a. During 2012, the licensing unit reviewed information summaries of criminal information for all individual licensees. The review was conducted using the Israel Police's criminal records and included individual licensees and individuals whose licenses are suspended. The purpose of the review was to examine whether any licensees have criminal records, which they have failed to report despite the requirement to do so by Law, in order to verify their credibility.
b. In 2012, a chairman of the board of a portfolio management company was indicted for economic violations. Following discussions on the matter between the ISA and the company, the chairman resigned, without a need for a formal proceeding.
c. During the year, the ISA conducted an audit in a portfolio management company, which yielded that the company is managed by a controlling shareholder which was barred from working in it in the past due to criminal charges filed against him. Following the audit, immediate proceedings, the controlling shareholders changed the company's control structure, so as to prevent him from having influence on the corporation's activities. Following the change, the company was able to obtain the license.
d. During the year, the ISA conducted an audit in a portfolio management company, which yielded that the company was managed by a controlling shareholder who was barred from working in it in the past due to criminal charges filed against him. Following the audit, immediate proceedings were initiated in order to protect the interests of the investing public in the company. In addition, the ISA initiated proceedings to revoke the company's license.
c. Supervision
As of the end of 2012, there were 134 portfolio management companies, 28 investment marketing companies and 11 investment consulting companies active in Israel, making a total of 173 companies. In addition, there were total of 5,122 individual license holders, who are either employed by banks, portfolio management, and investment marketing and advisory firms or work independently. Out of individual license holders, there are 3,572 advisors, 924 portfolio managers, and 626 investment marketers.
Due to the large number of supervised individuals, resources had to be reallocated for efficiency purposes, so that the various inputs fit the risks embodied in the supervised entities. As carried out using a modular supervision model based on a risk management policy, which reflected the heterogeneous nature of the supervised entities for which the ISA adjusts various supervision options.
Supervision over investment advisors, investment marketing agents and portfolio managers focused mainly on the following issues:
84 (i) Ongoing rapport with the supervised entities and close accompaniment
The activity of the Department in 2012 included ongoing rapport with supervised entities. The ISA is responsible for the close following of these entities, which constitutes a significant part of the Department’s work and is designed to guide supervised entities regarding proper conduct and allow for a direct connection between the ISA and supervised entities. The Department conducts meetings with those in charge of enforcement at the supervised entities, including periodical update meetings, and supervises internal enforcement programs, etc. As part of the ongoing rapport, the ISA requires supervised entities to monitor their own work on a number of issues related to the Investment Advice Law and report their findings to the ISA. In addition, the Department staff participates in the meetings of the investment portfolio managers’ Compliance Officers’ Forum and in quarterly meetings with bank representatives from the Association of Banks in Israel.
This year, the ISA staff began to hold annual meetings with fund managers, in order to deepen their knowledge thereof and maintain an ongoing dialogue with them. Many issues raised in these meetings found their way to the Regulatory Exemptions paper included in the ISA's Roadmap.
(ii) Auditing
(1) During the reporting year, two types of audits were conducted regarding compliance with the provisions of the Investment Advice Law:
(a) Cross-sectional audits – examining one particular issue in a large number of companies. During the reporting year, five cross– sectional audits were conducted, as follows: All of the cross– sectional audits were conducted by way of correspondence, in which companies or banks were requested to provide documents.
(b) Company-specific audits – audits of specific issues related to the Investment Advice Law in licensed companies and advisory departments in banks.
In 2012, the Department conducted 61 company–specific audits, 45 of which were completed during the year and 16 are yet to be completed, as follows:
34 of the company–specific audits were conducted in the offices of the companies or bank branches..
27 of the company audits were conducted by way of correspondence, and the companies or banks were requested to provide documents..
Cross-sectional audits
1. During 2012, the Department completed a cross–sectional audit regarding the regarding the compliance of banks with the Investment Advice Law provisions dealing with documenting advice activities. The audit included nine banks.
85 2. During the reporting year, the ISA initiated a cross–sectional audit, by way of correspondence, with all portfolio managers, regarding the use of distribution accounts.
3. In 2012, the Department completed a cross–sectional audit in all portfolio managers on the issue of compliance with the provisions of the Investment Advice Law regarding management agreements and reporting to clients, especially regarding the requirement to learn about clients' needs. The audit included 30 firms.
4. During 2012, the Department completed a cross–sectional audit regarding the compliance of banks with the Investment Advice Law provisions dealing with study funds. The audit included five banks.
5. In 2012, the Department began a cross–sectional audit regarding the provisions of the Investment Advice Law dealing with the requirement to determine working procedures. The audit included 16 firms.
In addition to the cross–sectional audits, the Department examined, during the reporting year, activities in securities conducted by portfolio managers by way of transaction analysis of current irregular trading reports, as well as by firm–specific audits of portfolio managers.
During the reporting year, the Department also collected extensive information from all 14 banking corporations which engage in investment advice for the purpose of conducting a comparative review of the banks’ activities in the investment advice field.
Company-specific audits
1. During the year, 26 in-depth company audits were conducted in portfolio managers regarding the control environment and compliance with the Law. Some of the audits were conducted by the Department staff and others – through outsourcing. In addition to said audits, five audits which began during the reporting year have yet to be completed.
2. During the reporting year, 12 issue-specific audits were conducted in licensed companies, by way of correspondence. These audits examined one or more of the following issues: agreements with clients; keeping record of clients’ preferences and drawing written agreements; adequate disclosure; notification of interests in financial assets; prohibition of preferential treatment; management fees; receiving unlawful incentives; insurance and equity. In addition to said audits, eight audits which began during the reporting year have yet to be completed.
3. In 2012, the Department completed seven audits in advisory departments of banks. These audits examined one or more of
86 the following issues: duty of trust; identification of client preferences; adapting services to client preferences; prohibition of preferential treatment; duty of care; keeping record of investment advisory sessions; supervision and guidance of advisors; quality of advisory services. In addition, to said audits, three audits which began during the reporting year have yet to be completed.
(2) Audits examining compliance with the Prohibition on Money Laundering Law of 2000 (hereinafter – the Money Laundering Law) and Prohibition on Money Ordering Order (Identification, Reporting and Keeping Records Requirements by Exchange Members for the Purpose of Preventing Money Laundering and Financing of Terrorism) of 2010 (hereinafter – the Money Laundering Order).
During the reporting year, the Department conducted 12 audits on this issue with portfolio management first that are banking Stock Exchange members (NBMs). The audits were conducted by way of outsourcing. The audit examined the companies' compliance with the Money Laundering Order, including: identification requirement; verification of identifying details; statement regarding controlling shareholder and beneficiary; identification in person; keeping record of identifying documents; regular and special reporting to the Money Laundering Prohibition Authority; the existence of a computerized database. In addition,
(iii) Ongoing follow-up on license holders
1. Analysis of trading activities conducted by portfolio managers in order to detect unlawful activity.
2. Follow-up on websites of supervised entities.
3. Follow-up on news items regarding supervised entities.
4. Enforcement of reporting requirements and review of reports in the following areas:
a. Filing of annual reports in accordance with Section 27(a) of the Investment Advice Law, in a complete, accurate and timely manner.
b. Reporting any failure to comply with the terms of the license in accordance with Section 27(c) of the Investment Advice Law.
c. Reporting of licensed staff by licensed firms, mutual fund managers and banks in accordance with Section 27(c3) of the Advice Law.
Furthermore, companies whose annual financial statements indicated that they failed to meet equity and/or insurance requirements at the end of the reporting year were required to take the necessary corrective action immediately, so as to comply with the Law. Failure to do so would lead to revocation of the license.
(iv) Investigation of alleged violations of the Investment Advice Law
87 The Investment Department investigates alleged violations of the Investment Advice Law. These investigations are carried out following public complaints or following suspicions that arise during the ordinary course of the Investment Department's operations. In addition to conversations with those persons submitting complaints, investigations include meetings with banks and Exchange members for further information, and a detailed examination of the findings. When these investigations are finalized, a decision is made regarding the course of action for each case, bearing in mind, inter alia, public interest, reliability of the information, and the quality of evidence
During the reporting year, 111 cases of prima facie criminal and/or disciplinary violations were investigated, of which 17 cases were from the previous year. Of the 111 cases investigated, 93 cases were closed, as follows:
40 cases were handled in the following manner:
14 cases were submitted for auditing. In six cases the ISA issued letters to relevant persons concerning flaws identified during the investigations, requiring them to remedy the flaws and report thereof to the ISA. Four cases were transferred to other departments; 15 cases were forwarded to handling outside the ISA. In one case, alternative enforcement measures were taken.
53 cases were closed for one or more of the following reasons: no violation of the Law was found; lack of evidence; non-cooperation by the complaining party or inability to contact the complaining party; lack of public interest due to the time that elapsed between the violation and the filing of the complaint.
As of the end of 2012, 18 cases were still pending.
(v) Conferences for license holders
Holding professional conferences for license holders is another vehicle for maintaining an ongoing direct contact with license holders. Such conferences represent an additional opportunity for the ISA to clarify its stances on a number of issues related to the Licensing Law, as well as for license holders to react and provide the ISA with information on various issues. These conferences allow the Department’s staff to present the principles underlying its supervision work – where materiality supersedes technical details, giving specific examples and conducting a fruitful dialog. This year, the Investment Department staff held a conference for district and regional investment advisors in banks, regarding how to conduct and document an advisory session. In addition, following a request by banks, it was decided that the Department staff will lecture in conferences held by banks from time to time for their investing advisors, presenting the ISA’s stance on relevant issues. This year, the Investment Department staff participated in two conferences held for license holders, where they presented their stance on how to conduct and document an advisory session. This year, the supervision unit held one conference for licensees
88 working in banks, attended by 950 investment advisors from banks. The conference focused on investment advice in banks.
In addition, the ISA initiated periodical meetings with investment advisors (Investment Advisors Forum). These meetings – which focused on professional issues and increasing the efficiency of investment sessions – included advisors from all banks engaged in investment advice (a single representative from each bank) and Department staff members.
(vi) Training
In order to improve compliance by licensed companies, the ISA continued to provide training to all new companies and licensees in 2012. Training sessions are conducted with each company separately, near the date on which licenses are granted. Training sessions are carried out in person with the management and employees of each company. During training sessions, the company's representatives review the main points of the Investment Advice Law and Money Laundering Law, including the company’s duties towards its clients and regulators. In addition, company representatives receive information on problems and flaws found in audits conducted in other companies, along with information on how to avoid such pitfalls. Training is conducted in small groups, which allows training supervisors to address specific questions raised by company representatives. In 2012, 14 training sessions were carried out, 12 of which for new companies and two for independent license holders, emphasizing companies' duties to act first and foremost for the benefit of their clients, and further stressing the need for internal company controls and enforcement.
d. Regulatory activities
(i) Staff bulletins
The ISA publishes staff bulletins stating its position on interpretations of the law in matters with broad implications, which pertain to a number of queries or to the market as a whole, and which the ISA deems to be lacking in clarity, in need of further clarification, or too broad and in need of specification.
In 2012, the staff issued six staff bulletins on various issues pertaining to the provisions of the Advice Law and regulations thereof. These included bulletins in which the staff stated its stance regarding findings in audits it had conducted on various issues.
(ii) Pre-ruling
During the reporting year, 16 pre-ruling requests concerning the Advice Law and the Prohibition on Money Laundering Law were received by the Investment Department. Five of them are still pending.
89 (iii) FAQs
During the reporting year, the ISA staff continued to publish, on an ongoing basis, FAQs addressed to it by supervised entities with the aim of increasing transparency vis a vis supervised entities and clarifying the legal environment in which they operate.
During the reporting year, the ISA staff continued to publish, on an ongoing basis, answers to questions raised in the course of implementing the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management (Reports) Regulations, which became effective on December 14, 2012. Dozens of FAQs were published on the ISA website in order to assist licensees in implementing the new regulations.
e. Enforcement activities concerning license holders
(i) Civil fines imposed under Chapter G1 of the Law:42
According to Section 38A of the Advice Law, the ISA may impose civil fines on anyone violating the provisions of the Law. The ISA collects the fines and transfers them to the State Treasury.
Under this Section, the ISA imposed fines on six licensed firms in and one licensee.
On February 17, 2011, the Reduction Regulations went into effect, which authorize the ISA to reduce civil fines for causes prescribed in the Regulations and by percentages detailed therein. In 2012, the ISA exercised its aforementioned authority in seven cases.
Table 21: Violations for which fines were imposed and fine amounts imposed on licensees in 2012
Violation for which fine was Sections violated in Fine amount imposed Investment Advice Law 1 Section 17(a), Section 13(d) Section 8a(b)(1), Section NIS 482,480 38a(d) 2 Ongoing violation of Section Section 38a(d), Section NIS 29,120 27(c) 38d(a) 3 Ongoing violation of Section Section 38a(d), Section NIS 23,992 27(c) 38d(a)
4 Section 25 and Regulation 6 of Section 38a(b)(4) NIS 390,000 the Lawful Registration Regulations
5 Section 26 Section 38a43 NIS 105,000
42 Unless specified otherwise, the sections of the Law noted in this chapter are in accordance with the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments) of 2011, with the relevant sections having changed. The abovementioned amendments went into effect on February 27, 2011. It should also be noted that the former term "civil fines" was superseded by "financial sanctions" in the amendments. 43 Section 38 following the Amendment.
90 6 Section 26 Section 38a44 NIS 75,000
7 Section 4(a) of the Law Section 38a(d) NIS 7,300
No fines were appealed.
(ii) The Financial Sanctions Committee in accordance with the Money Laundering Law:
According to Section 14 of the Money Laundering Law, the Committee is authorized to impose financial sanctions on those violating Section 7 of the Law. Fines are collected by the ISA and transferred to the Administrator General for the benefit of a fund established under the Dangerous Drug Order.
In light of audits conducted in portfolio management companies, in which violations of the Money Laundering Law and Orders were discovered, the ISA imposed a financial sanction on one company.
Table 22: Violations for which financial sanctions were imposed in 2012 and fine amounts
1 Violation for which Sections violated under Financial sanction financial sanction was Money Laundering Order amount imposed45
2 Sections 3, 4, 7, 9, 14(a), Section 14 of the Law NIS 412,500 46and 15(a) of the Order
4. Legislation activity involving the Department
In 2012, the Investment Department drafted and promoted legislative proposals and legislative amendments as follows:
44 Section 38 following the Amendment. 45 Sections violated under the Money Laundering Law for which financial sanctions were imposed. 46 Prior to the last amendment, which became effective on May 30, 2011.
91 a. Regulations published during the year
1. Joint Investment Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts) (Amendment) of 2012 [Kovetz HaTakanot (Collection of Regulations) 7087, page 735] (hereinafter – the Assets Regulations); Joint Investment Trust Regulations (Purchase and Sale Prices of Fund Assets and Value of Fund Assets) (Amendment) of 2012 [Kovetz HaTakanot (Collection of Regulations) 7087, page 739] (hereinafter – the Price Regulations); Joint Investment Trust Regulations (Details, Structure and Form of a Fund Prospectus) (Amendment) of 2012 [Kovetz HaTakanot (Collection of Regulations) 7087, page 735] (hereinafter – the Prospectus Details Regulations); Joint Investment Trust Regulations (Financial Statements of Mutual Funds) (Amendment) of 2012 [Kovetz HaTakanot (Collection of Regulations) 7087, page 737] (hereinafter – Financial Statements Regulations); Joint Investment Trust Regulations (Options, Futures Contracts and Shorts) (Amendment) of 2012 [Kovetz HaTakanot (Collection of Regulations) 7087, page 737] (hereinafter – the Options Regulations).
A number of years ago, extensive amendments were made to the Assets Regulations, which established a regulatory framework for a new instrument known as fund of funds. A fund of funds is an open ended fund which may invest all of its assets solely in other funds, bank deposits, or cash. There are two types of funds of funds in Israel – Israeli and foreign. For Israeli funds of funds, investment has been limited only to those funds managed by a fund of funds manager. In foreign funds of funds, fund managers may only invest in funds established outside of Israel.
Under the amendment, managers of Israeli funds of funds may invest in any open ended fund which is not a fund of funds, including mutual funds which are not under their management. The new legal framework allows all fund of funds managers – and particularly fund managers who manage a small number of funds and whose diversification options through their managed funds are therefore limited – to diversify their asset portfolio.
Another amendment has also been made to the Asset Regulations, concerning mutual fund managers’ ability to purchase structured debt certificates on the TACT Institutional market. In recent years, structured debt certificates are not issued in the ordinary course of trading on the Stock Exchange, and so the Amendment aims to create conditions facilitating sufficient marketability of these assets on the TACT Institutional market.
The Price Regulations were adjusted in terms of revaluation methods of units held by an Israeli fund of funds, in order to adjust the provisions to said amendment to the Asset Regulations .
The Prospectus Details Regulations were adjusted in terms of the number of information details a fund manager is required to disclose in a prospectus issued by a fund of funds, following said amendment to the Asset Regulations.
92 In addition, the Financial Statements Regulations were amended, so as to postpone the effective date of the requirement for mutual fund managers to prepare financial statements in accordance with IFRS, and determines that the requirement shall not become effective for the 2012 fiscal year, but rather only for the 2016 fiscal year. Finally, the Options Regulations were technically amended, so as to clarify a definition of indices on the Exchange.
2. Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Reports) [Kovetz HaTakanot (Collection of Regulations) 7129, page 1234]
The Regulations were published on June 14, 2012, and went into effect six months from publication.
The Regulations regulate disclosure requirements for license holders under the Investment Advice Law, on the following two levels: first – quarterly reporting by portfolio managers to clients on managed portfolios; second – immediate, quarterly and annual reports to the ISA.
Prior to the publication of the regulations, reporting requirements for license holders were extremely limited. Thus, for example, the law did not require portfolio managers to provide clients with disclosure on the return yielded by a portfolio over a certain period of time. Nor was any disclosure required on whether a client earned or lost money over a given period. Furthermore, reports sent to clients were not uniform in form or content. As a result, it was difficult for clients to locate essential information, even if such information was contained in the report. In addition, potential clients were not provided with uniform and comparable information, and did not have adequate tools to choose between licensed companies, as each company determined the content which it presented to potential clients and the manner in which it was presented.
The guiding principle in determining disclosure requirements was to create a balance between information essential to clients, the public and the ISA, avoiding disclosure of license holders' commercial information, as well as excessively cumbersome requirements for license holders.
The regulations set both form and content requirements for disclosure by license holders. In other words, the reporting format prescribed by the Regulations is binding. This reform coincides with other recent ISA initiatives, in terms of scope of disclosure required of supervised entities and of establishing uniform reporting formats.
In addition, the regulations require banks to report on advisory activities carried out through license holders under their employment. Reporting is carried out through two channels: first – monthly reports by the banks, detailing all advisory activities carried out in the preceding month. Second – reports submitted following a demand for more information by the ISA.
93 3. The Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Services Regulations (Application for License, Examinations, Internship and Fees) (Amendment) of 2012 (Licensing Regulations) [Kovetz HaTakanot (Collection of Regulations) 7182, page 196]; Securities Regulations (Annual Fees)(Amendment) of 2012 [Kovetz HaTakanot (Collection of Regulations) 7182, page 191]. The Regulations went into effect on January 1, 2013.
The Amendment changes the previous situation, where all portfolio management companies paid a fixed fee (of NIS 4,500) and prescribes that the fees shall be relative to the value of the companies' managed assets. The fee shall be 1/30,000 of the asset value, with a minimum of NIS 5,000 and a maximum of NIS 600,000. In addition, in order to narrow the gaps between fees paid by fund management firms and those paid by fund managers, the Securities Regulations (Annual Fee) of 1989 were amended, so that annual fees payable by fund managers shall be permanently reduced by 10%.
4. The Secuities Regulations (Annual Fees) (Temporary Provision) of 2012 [Kovetz HaTakanot (Collection of Regulations) 7182, page 190]; Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Services Regulations (Application for License, Examinations, Internship and Fees) (Temporary Provision) of 2012 [Kovetz HaTakanot (Collection of Regulations) 7182, page 192].
Under the Regulations (and similar regulations which pertain to other supervised entities), an all inclusive temporary order was enacted, according to which the fees payable by all of the ISA's supervised entities shall be reduced over the next five years, as follows: 40% during the first two years, 30% during the next two years, and 20% in the fifth year. The reduction began in 2011 for fund managers, and in 2012 went into effect for license holders for the first time.
b. Legislative proposals (primary and secondary)
1. Regulation of ETN and ETFs
During the past two years, the ISA's staff has been engaged in developing an amendment to the Joint Investment Law, under which the ETN sector shall be regulated, and in creating a legal infrastructure for a new financial instrument, an Exchange Traded Fund (ETF) which would expand the choice of financial products currently offered, allow for fair competition between alternative products and increase competition.
Current legislation creates regulatory arbitrage between products which are extremely similar in nature and purpose. While regulation of mutual funds under the Joint Investment Law is detailed and binding, providing close supervision, ETNs, which offer an investment alternative to mutual funds, are only subject to disclosure requirements and to certain corporate governance requirements – under the Securities Law and Companies Law – which are not completely suited to this type of instrument. The Amendment aims to regulate the ETN market similarly to mutual funds, mutatis mutandis.
94 In addition, a proposed amendment was submitted, with the aim of regulating a new financial instrument: ETF. ETFs will track mutual funds, and theirs units will be listed for trade on the Exchange, and will only be available for purchase during the course of trading.
In 2012, a proposed amendment (no. 21) To the Joint Investment Law (ETNs and ETFs) of 2012 was published (alluded to in the ISA's 2011 Annual Report as Amendment 16 to the Law). The Amendment was approved by the Knesset in its first reading and is currently pending review by the Knesset Finance Committee prior to its second and third readings. In addition, the ISA published for public comment, on its website, more than ten proposed amendments for regulations or proposals for new regulations needed in order to implement the Amendment.
During the past three years, the Staff has been engaged in developing a regulatory model for the ETN sector, in cooperation with the ETN Union. On November 13, 2011, the staff published the main principles of the regulatory model for the ETN field on its website. The aim of the model is to handle the various risks that arise from ETN activity – operational risk, market risk, credit risk, and liquidity risk.
The following are the main principles of the regulatory model:
(i) Moving to a supervisory regime – the EFN field will move to a supervisory regime, regulated under the Joint Investment Law, similarly to mutual funds. Thus, ETNs will no longer be under a disclosure regime, and will be bound by the same corporate governance rules which apply to mutual funds. The new legislation will also enhance the position and responsibility of ETN trustees. As such, the backing assets will be transferred to the ownership of investors and will be held under the custody of trustees, with the ETN managers being liable only for the difference between the value of assets held by investors and their liability towards their investors. The liability will be adjusted on an ongoing basis, and shall be backed by capital allocations, deposited in special accounts supervised by the trustees and serving as available cushions (also known as "backing accounts"). In addition. The trustees' duty to supervise ETN managers will be prescribed by law, similarly to mutual funds.
(ii) Risk management and capital allocation model – the principles of risk management were manifested in several proposed regulations, including regulations dealing with backing accounts, assets that may be bought and held by a fund and their maximum amounts, conducting ETN transactions, managing assets of ETNs, liabilities and risks embodied in ETNs, etc. In 2012, ETN issuers began implementing some aspects of the supervision model. The following issues are regulated by the proposed regulations:
(1) Market risks – models of risk measurement and management, including a value at risk (VaR) model and extreme scenarios. The model regulates the manner in which VaR is calculated, and provides the basis for ongoing measurement of the company’s exposure and
95 allocation of risk capital. In 2012, the ISA staff followed up on the implementation of market risk models by ETN issuers.
(2) Investment and credit risk principles – during the past year, the Department developed – in cooperation with ETN issuers – principles regarding the types of investments that ETN companies would be permitted to make, the limits on entities in which they may invest and other aspects of internal supervision over such investments. The purpose of this is to ensure that the funds of ETN holders are invested so as to minimize the risk exposure.
(3) Allocation of risk capital model – the model establishes the allocation of capital required for operational risk, market risk, and credit risk. The purpose of the model is to neutralize economic incentives for creating exposures, and – on the other hand – encourage solid conduct by ETN issuers.
(iii) Other issues addressed by the regulations include a redemption formula, calculating returns on ETNs, details of prospectuses, reporting by ETNs (see the detailed list hereunder).
Proposed amendments
The following are proposals for new amendments which are intended to regulate ETNs and ETFs, as well as a proposal to amend the Joint Investment Regulations, so as to adjust them to ETNs and ETFs in order to narrow gaps between the mutual funds and ETN regulatory regimes, mutatis mutandis:
(1) Joint Investment Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts) (Amendment) of 2012, and Joint Investment Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts, and Performing ETN Transactions) of 2012;
(2) Joint Investment Trust Regulations (Managing ETN Assets, Liabilities and Risks Embodied therein) of 2012;
(3) Joint Investment Trust Regulations (Redemption Formula) of 2012;
(4) Joint Investment Trust Regulations (Publishing Unit and Redemption Prices in Open Ended ETNs and Unit Price and Value in Closed End Funds) (Amendment) of 2013;
(5) Investment Trust Regulations (Transactions with Possible Conflicts of Interests, Material Transactions and Non Exchange Transactions) (Amendment) of 2012;
(6) Joint Investment Trust Regulations (Transactions with Possible Conflicts of Interests, Material Transactions and Non Exchange Transactions) (Amendment) of 2012;
96 (7) Joint Investment Trust Regulations (Report by a Closed End Fund on Results of an Offering and Cancellation of an Offering) (Amendment) of 2012;
(8) Joint Investment Trust Regulations (Classification of ETNs and ETFs for Publication Purposes) (Amendment) of 2012;
(9) Joint Investment Trust Regulations (Activity of an ETF Manager During Trading on the Exchange) (Amendment) of 2012;
(10)Joint Investment Trust Regulations (Joint Investment Reports) of 2012;
(11)Joint Investment Trust Regulations (Ownership Proof of a Joint Investment Unit for the Purpose of Voting in a General Meeting) of 2012;
(12)Joint Investment Trust Regulations (Calculating Returns of ETNs and ETFs) of 2012; Joint Investment Trust Regulations (Calculation of Returns) (Amendment) of 2012.
For more information regarding the amendments, please see the Legislation Department chapter.
The ISA's staff reviews public comments on legislative proposals and adjusts the proposals accordingly.
2. Proposed Bill for Regulation of Credit Rating Agency Activities of 2012
The Bill aims to establish a regulatory framework for the activity of credit rating agencies in Israel. Globalization, developments in financial engineering, and the Basel II Accord have all enhanced the years. Following the "sub–prime crisis" and the subsequent credit crisis, flaws were uncovered in the activities of rating agencies, especially in terms of conflicts of interest, which may result in biased ratings and lack of transparency. The major role played by rating agencies in these crises resulted in unanimous agreement among regulators in the US and Europe as to the need to re– examine and increase regulation in this field. Thus, it was decided that Israel would regulate, through a specific law, the activity of rating agencies and subject them to the ISA's supervision, so as to protect the investing public and ensure that the rating and rating process be reliable and independent.
The proposed bill was published in the Official Gazette on November 5, 2012.
3. Joint Investment Trust Regulations (Material Change in a Fund's Investment Policies) (Amendment) of 2012 and Joint Investment Trust Regulations (Material Change in an ETN's Investment Policies) of 2012
Currently the Joint Investment Law allows a fund to change its investment policies once every 12 months, and authorizes the Minister of Finance to define cases and circumstances in which a fund manager may introduce additional material changes within the 12 months' time frame. Such cases and circumstances were defined by the Joint Investment Trust Regulations
97 (Material Change in a Fund's Investment Policies) of 2007 (hereinafter – the Material Change Regulations).
A material policy change often results in forcing a decision on a large number of unit holders, who have chosen to purchase units of one fund over another, which is not necessarily in line with their inclinations. Experience teaches us that many investors tends not to react immediately to changes in fund characteristics and continues to hold units of funds they would not have invested in in the first place had they been aware of their investment policies on time.
Thus, in order to provide unit holders with certainty and protection regarding their portfolio, the ISA proposed, under Amendment 21 to the Law, to prohibit making material changes in investment policies of joint investments. As a complementary step, a need arose to redefine what constitutes a material change in a joint investment and, in addition, redefine and narrow cases in which such material changes are allowed despite the prohibition on making such changes. The ISA proposes to revoke the current definition of a material change as a "material change in the investment policies of a fund" and to authorize the Finance Minister to it for each type of joint investment.
4. Joint Investment Trust Regulations (Distribution Fees) (Amendment) of 2012; Joint Investment Trust Regulations (Compensation of Fund Manager) (Temporary Provision) of 2012.
The Distribution Fees Amendment proposes to reduce distribution fee rates collected by distributors (banks) from fund managers, so that the new rates of distribution fees will be as follows:
Solid short term funds – 0.2% (rather than 0.25%); money funds – 0.1% (rather than 0.125%); other funds – 0.35% (rather than 0.8% for stock funds and 0.4% for other funds)
In order that the reduction in distribution fees result in the reduction of management fees paid by mutual fund investors as explained above in Section 2.a., a temporary provision is proposed, whereby fund managers shall deduct the entire fees saved as a result of reductions in their distributions fees, for a period of six months, during which management fees will not be increased. Following that period, the funds will determine their own management fees independently. The assumption is that due to competition between fund managers, the reduced fees will remain in place. The proposed regulations in this matter will come under the proposed authorization section, described under Section 4.a.i.
The Regulations were submitted to the Finance Committee for approval
98 5. Regulation of Investment Marketing, Portfolio Management and Investment Marketing (Requirement to nominate Senior Officers in Large Portfolio Management Companies and Conditions for their Eligibility) of 2012; Joint Investment Trust Regulations (Requirement to Nominate Senior Officers in Fund managers and Trustees and Conditions for their Eligibility) of 2012; Joint Investment Trust Regulations (Equity Capital and Insurance for Fund Managers and Trustees and Eligibility Conditions for Board Members and Investment Committee Members) of 2012.
On November 16, 2011 the Corporate Governance Law for Fund Managers and Portfolio Managers (Legislative Amendments) of 2011 was published (hereinafter – the Corporate Governance Law), with the aim of promoting and improving the corporate governance requirements already in place for trust fund managers, as well as to apply a new corporate governance regime to large portfolio companies. Under the Law, the Minister of Finance was authorized to enact regulations which determine eligibility conditions for senior officers of large portfolio management companies. In addition, the Minister's authority regarding corporate governance in fund managers was extended. The aim of the proposed regulations is to prescribe efficient supervisory mechanisms be operated by skilled and experienced professionals, who are able to deal with current capital market challenges.
The proposed amendments regarding fund managers and trustees will change the existing situation in the following manner: changes in eligibility requirements for directors and investment committee members and those in charge of trust roles in fund trustees; determining eligibility requirements for members of audit committees; a requirement to nominate additional officers – head of internal control and head of internal enforcement program, who will be required to meet certain eligibility criteria, in order to increase effectiveness of corporate governance in funds.
Similarly, the proposed amendments regarding large portfolio management companies prescribe provisions regarding eligibility of directors and members of the audit committee, as well as a requirement to nominate a head of the internal control program and head of internal enforcement program and list their eligibility criteria. Eligibility is measured by education and professional experience.
The regulations were approved by the ISA Plenum on November 25, 2012.
6. The following actions qualify as violations of the trust and care duties:
The Administrative Enforcement Law included amendments to the Joint Investment Law and the Investment Advice Law, where it was determined, inter alia, that any action listed by the ISA constitutes a violation of the duties which fund managers or trustees are bound by may result in administrative sanctions. A similar arrangement exists in the Investment Advice law. Accordingly, the proposed lists refer to actions or omissions which pertain to any of said laws. The amendment and list were approved by the ISA Plenum for publication for public comment On October 24, 2012.
99 7. Draft bill which relates to the ISA's activity
Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management draft bill (Amendment 19) (General Investment Advice and Investment Marketing) of 2012
The Bill covers the following main issues:
Defining general investment advice and general investment marketing services (hereinafter – General Services), while distinguishing between these and investment advice and investment marketing services. Furthermore, the bill does not require licensing for the provision of General Services, and stipulates specific provisions for such services.
The bill applies the investment advice and investment marketing services provisions on activities which essentially constitute General Services, even though these activities do not pertain to securities or financial assets as defined by law.
The bill was approved by the Knesset in its first reading on July 24, 2012, and is currently pending review by the Knesset Finance Committee in preparation for its second and third readings.
5. Judicial proceedings involving the ISA
1. Supreme Court Case 3803/11 Union of Financial Market Trustees in Israel; Supreme Court Case 4694/11 Union of Exchange–Traded Notes under the Tel Aviv Chamber of Commerce and Union of Members of the Tel Aviv Stock Exchange (non banks); Supreme Court Case 5437/11 Union of Investment Trust Managers vs. the State of Israel, the Minister of Finance, the Israel Securities Authority, the Knesset of Israel and the Minister of Justice
Shortly after the publication of the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments) of 2011 regarding administrational enforcement, three administrative petitions requesting order nisi were filed, in reference to arrangements as determined by the abovementioned law, especially in regards to the prohibition on indemnification and insurance, the appeal arrangement as determined by the law and the mechanism for imposing financial sanctions. The three petitions were heard together, and were rejected in limine (the court's decision was handed down on February 5, 2012).
2. Civil Appeal (Tel Aviv) 25968–03–11 State of Israel v. Anonymous et al. In November, the District Court decided on mutual appeals filed in response to a decision by the Disciplinary Committee, according to which an investment house, its co-chairman and one of its investment advisors, violated Section 30(a)(1) of the Investment Advice Law in 2003, by violating Sections 12, 13 and 25 of the Law regarding a client who invested with them.
10 0 3. Supreme Court Case 8136/11 Union of Fund Managers vs. the Finance Minister and the Israel Securities Authority – petition against Amendment 19 to the Joint Investment Law regarding the publication of prospectus covers in newspapers, following a private bill filed with the Knesset, a bill not supported by the ISA and accepted against its view. The ISA announced that in due time, if it realizes that the legislative arrangement is unneeded from a regulatory point of view, it shall initiate – through the Ministry of Finance – a proper legislative procedure to remedy the situation.
According to the court, the investment house and investment advisor were required to thoroughly examine the needs of the client, and adjust their advice accordingly. This constitutes an independent duty, applicable to the investment house and advisor, and was examined independently of whether the client agreed to invest in the products offered to him. According to the court, the client's agreement at the end of the process does not necessarily mean that the advice was tailored to his needs. In addition, the court decided that the advice process is an inclusive procedure, which is inseparable from other aspects. Thus, even if the advice session includes products that are not defined under the Investment Advice Law as "securities and financial assets", the provisions of the Law do apply.
The court convicted the investment house in accordance with the Doctrine of Ostensible Authority, following the conviction of the investment advisor, since the investment advisor constitutes an organ of the investment house. Nevertheless, according to the court, since administrative laws – replacing disciplinary laws under which the appeal was filed – came into effect following court hearings but prior to the court's decision, the material legislative change favors the appellants. Thus, applying criminal law principles, the court decided to apply administrative law to the case. As a result, the conviction in accordance with Sections 13 and 25 of the Investment Advice Law was overturned.
Due to the legislative change, the court accepted the appeal and imposed a NIS 30,000 fine on the investment house, in addition to issuing a warning, as well as a NIS 30,000 fine on the investment advisor. The court rejected the State's appeal on the decision of the Disciplinary Committee to refrain from publishing the names of the appellants. The long period of time that had elapsed, the change in law and the reduction of the appellant's sentence make this a unique case, in which considerations of publicity, transparency and deterrence are undermined by the need to protect the appellants against unnecessary harm.
4. Class Action Suit 14144–05–09 Harel Pia Mutual Funds Ltd. v. Landmark Group Ltd. et al
Request for approval of a class action suit filed by a fund manager against a company whose securities were held by funds under its management. The lawsuit was also funded by the ISA. In addition, the Chairman of the ISA used his authority to join it as a party. The cause of action is misleading details in the defendant's prospectus. The court discussed whether the fund manager may file a suit in the name of the fund without express authorization from its
10 1 trustee. In this matter, the court agreed with the ISA that the law's intention is that the trustee provide the fund manager with a general authorization to conduct legal proceedings for the purpose of preserving the fund's assets, rather than a specific authorization to file a specific suit, and that the fund manager is the appropriate entity to file and manage a lawsuit dealing with violations of the law allegedly committed in a company in which the fund was invested.
10 2 VI Research, Development and Economic and Strategic Counseling Department
The Department of Research, Development and Economic and Strategic Counseling (hereinafter – the Economic Department) offers strategic counseling and direction to the ISA’s Chairman and departments on economic issues. The Department cooperates with other ISA departments, providing them with economic counseling on a wide range of issues, mostly following a request by the ISA chairman and/or other departments.
The Department develops and maintains computerized databases and indices for the ISA's use, for the purpose of ongoing follow up and assessing the ramifications of decisions and specific events. In addition, the Department is charged with developing other decision support systems.
Beyond its ongoing activity, in 2012 the Department focused on four areas: Development – creating and developing the ISA's economic information infrastructure as a decision support tool; Systemic risk – taking part in inter ministerial and international teams, whose purpose is to identify, monitor and minimize systemic risks; Assessing regulatory impact – planning regulation so as to determine the need and implications thereof; Economic research – conducting economic research on issues impacting Israel's capital market policies, as well as issues linked to the ISA's functions and purposes.
1. Development
As part of its ongoing work, the ISA develops and maintains, on an ongoing basis, computerized tools and databases for the purpose of monitoring and development of the economic and financial information infrastructure, which serves as a decision support system for the ISA.
2. Economic counseling
The Department offers economic counseling to ISA departments on various regulatory issues, such as: creating models for mapping and managing systemic risks; assessing viability of new regulation; assessing the impact of revoking existing regulation; providing opinions in ISA investigations. These are examples of some of the issues the Economic Department took part in and even led new initiatives. In addition, the Department takes part in updating information for international organizations.
In 2012, the Economic Department led two work teams: the capital market team and the ISA team on systemic risks management. In addition the Department participated in work teams on various issues in the ISA, and/or on behalf of the ISA: enforcement forum, capital market forum, the ISA's team on managing systemic risks and the ISA team on knowledge management.
3. Strategic counseling
In addition to economic counseling, the Department offers strategic counseling and direction to the ISA’s Chairman and various departments. Thanks to the research
10 3 experience of the Department staff, it is able to analyze economic data and information, monitor capital markets worldwide, and follow up on regulation changes and especially – economic developments. This analysis serves as a basis for the ISA's strategic decisions and supports policy setting in line with the ISA's roadmap, thus ensuring regulatory efficiency. The Department's added value stems from its systemic view of all regulatory areas under the ISA's purview and its use of assessment methodologies from the world of finance.
4. Managing systemic risks
The 2008 economic crisis and the unstable sentiment in world markets ever since have increased preoccupation with the issue of systemic risks – the risk that entire systems will be disrupted as a result of a triggering event (such as a crisis at a specific firm or organization), which would result in an overall market crisis.47 Academic research and field testing have shown that the crisis has resulted in a need to maintain macro-prudential policies in regulating authorities as well as in the capital market itself, rather than only in the banking system.
In order to identify, monitor and decrease – in advance, as far as possible – capital market phenomena which may develop into risks with systemic implications, the ISA formed a special team, which is led by the Economic Department. As part of this role, the Department characterizes the information needed by various ISA departments and existing databases in order to develop tools and indicators which would help identify the level of systemic risk on an ongoing basis.
According to IOSCO (the international organization of securities authorities), systemic risks are divided into three categories:
Risks arising from the securities market, such as: market infrastructure, market innovation, price distortion, and inadequate conduct by key players.
Risks arising from the securities market and the role of the capital market – macro-financial risks, "shadow banking".
The role of the capital market in transferring shocks to the system – counter party risks in OTC markets as well as financing and liquidity crises.
Emphasis on additional key risks is needed in the Israeli capital market:
The economic concentration in many areas of the economy and the holding structures of corporate groups increases the risks for contagiousness;
The impact of political and security–related events both in Israel and the region;
Exposure to external shocks such as currency or debt crises;
47 The following is the International Monetary Fund's definition of systemic risk: A risk of disruption to financial services that (i) is caused by an impairment of all or parts of the financial system and (ii) has the potential to have serious negative consequences for the real economy.
10 4 Each capital market regulator must designate tools to dealing with factors which may increase systemic risk or increase the system's vulnerability to such factors under its purview. However, dealing with the systemic risks also entails close cooperation between relevant authorities. Only cooperation in which each regulator contributes its own expertise and insights, with all partners maintaining ongoing monitoring of the market and macro managing it, will lead to adequate and timely identification and handling of systemic risk factors.
In January 2012, an informal inter–ministerial team was launched, whose purpose is to identify, minimize and manage systemic risks in Israel. The team includes representatives from the Bank of Israel, Supervisor of Banks, Ministry of Finance and Israel Securities Authority. The Economic Department represents the ISA on the team, which holds bi–weekly meetings. The issues discussed by the team in 2012 were: general reviews, exposure of supervised entities to Europe, expectations for a credit crunch.
5. Compensation of senior officers
In the past few years – both in Israel and worldwide – there is a growing understanding that government intervention is needed on the issue of senior officer compensation in general, and particularly in the financial sector. The purpose of this intervention is to impose on senior officers behavior norms which would protect the interests of investors.
The Economic Department conducted follow up work on a research project from 2010–2011 on senior officer compensation. It includes ten chapters, dealing with all aspects of the issue.
The research paper examines many questions regarding the manner in which compensation is approved in company organs in Israel, transparency of approval procedures, the relation between the compensation structure, the company's profitability and the compensation structure's impact on the company’s financial position, as well as the level of compensation in relation to the senior officer's contribution to the company.
In order to assess such questions as well as others, the Israel Security Authority's Economic Department collected data on 67 companies from the Tel Aviv 100 Index (excluding dual listed companies and partnerships), between 2003 and 2011. In other words, the research focused on companies which formed part on the Tel Aviv 100 index as of the end of 2009 and followed up on these companies from 2003 to 2011. For 2003, there are data for only 53 companies.
Research data are of three main types: accounting data for the companies in the sample, derived from their annual financial statements; trade data which include market capitalization, return on stocks, percentage of market holdings and industry; data on ownership structure, including mapping of business groups' structure in accordance with their companies' reports and using data from Dan and Bradstreet Israel; data regarding group companies, their location in the control pyramid and the number of sample companies included in the business group; data on senior officers, such as name, roles in the company and in group subsidiaries, full time equivalent, all compensation components, year of birth, date of beginning of tenure, education and business experience in the past five years, holding
10 5 percentage in the corporation, whether the officer is an interested party or controlling shareholder or a member of a family which controls the corporation.
6. Regulatory impact analysis
One of the purposes of supervision is to ensure that regulation is cost efficient. In order for legislative initiatives to comply with this principle while achieving their aims, a process for assessing cost efficiency should be instated. The process should be incorporated into any legislative initiative from its very beginning, so as to direct regulation to the most efficient alternative. Regulators around the world have adopted various kinds and methodologies for ensuring cost efficiency. The Economic Department studied this issue in various markets so as to develop and implement a structured procedure with the aim of improving cost efficiency considerations in regulatory initiatives.
Regulating brokers and dealers
Under existing law, the activities of brokers and dealers are regulated by various bodies. However, some of the intermediaries and activities are not regulated by law or lack direct regulation. Thus, for example, the activities of brokers (i.e. – those performing transactions on behalf of another) and dealers (i.e. – those performing transactions for others out of the dealer's own account), lack comprehensive regulation. Currently, broker and dealer activities in Israel are usually carried out through trading floors (in banks and investment houses), in which brokerage services are provided to institutionals and significant private clients, market makers and trading platforms.
Currently, the ISA is developing a legislative framework for broker and dealer activity which will provide an appropriate response to the current situation, based on worldwide practices.
7. Voting by institutionals and ties between business groups
Following its research work on the market structure and proxy voting, and their influence on the involvement of institutional investors in votes, which was conducted in 2011, the Department initiated a research project on voting by institutionals and their ties to business groups and pyramids.
Many institutional bodies in Israel are held by conglomerates, a situation which may result in conflicts of interests between members and savers in these bodies and the personal and business interests of their controlling shareholders:
Controlling shareholders may exploit voting rights of institutionals under their control in order to support management proposals related to associates.
Business ties between institutionals and/or their controlling groups with publicly traded corporations may influence voting in these corporations.
Cooperation between business groups may influence voting by institutionals under the control of one of the parties.
10 6 As part of the research, a rating variable for corporate governance was defined, based on results of general meetings: rating will be based on the percentage of unapproved motions (or motions which were approved, but narrowly – close to one third, the minimum requirement) and whether companies are able to pass motions. The researchers will examine whether there is a difference in rating between companies which belong to controlling groups as opposed to "independent" companies.
8. Economic research
Research cooperation between the ISA and academic institutions
For the second year running, the Department held a competitive procedure for the purpose of recruiting researchers from academia for joint studies in order to expand the ISA's research infrastructure. Eligible candidates included researchers with a master degree or upwards, in a number of relevant fields. The subjects of the research studies are to be related to ISA’s areas of activity and goals, including: the development of the capital market; correcting economic and regulatory failures; protecting the investing public; increasing investors’ trust; and increasing public awareness of capital market issues.
Research studies started in 2012:
a. The impact of high frequency algo-trading strategies on Tel Aviv 25 company stocks
The study deals with the impact of high frequency algo–trading strategies on stocks included in the Tel Aviv 25 index. The purpose of the study is to assess market resilience in extreme conditions, through exposure to select strategies. High frequency algo–trading strategies are characterized as strategic, serial, event–based trading. As such, the study assessed – using market simulation – the various conditions which may impact market resilience and create events such as: a sudden price collapse; liquidity crisis or a sharp increase in volatility. Regulatory solutions will be offered based on the results of the study, with the purpose of improving market resilience. The proposed solutions will be selected using market simulation.
The study is based on using agent based simulation, which is the core of ACE – Agent Based Computational Economics. Such simulations constitute a powerful analytic tool which allow for insights regarding complex reciprocal relations between various types of capital market players (called agents).
b. Compensation of senior officers in control pyramids
The provision of incentives to senior officers is an accepted mechanism for solving the principal–agent problem, i.e. –conflicts of interest between decision makers and those who nominated them.
Pyramidal structures, which are very common in Israel and most world countries (except for the US and UK) are one of ways to create a gap between the holding rate and cash flow rights (wedge), while guarding against strengthening of control. In companies which form part of business groups
10 7 there is a different agent issue: the companies' executives serve the interests of the controlling shareholders rather than of all shareholders. In such companies, the compensation of senior officers may serve the controlling shareholder as a tool for rewarding obedient behavior which is against the best interests of minority shareholders. Ironically, in case of a significant gap, most of the compensation is paid by minority shareholders.
The study examines the question of how senior officers' compensation is determined in conglomerates. Are senior officers rewarded for maximizing the group's value or the interests of its shareholders? Is there a conflict between the two? Is a company at the bottom of the pyramid managed in a way that would maximize the wealth of controlling shareholders or of all shareholders? Does the controlling shareholder provide senior officers with extra compensation (e.g., in return for assistance in drawing private benefits?)
The study examines the relationship between control structures and senior officers' compensation in Israel in relation to other countries (Germany, Italy, France, England, the Netherlands, Spain and Poland). In this manner, a large sample of companies and conglomerates in different corporate governance regimes can be surveyed. The study will contribute to understanding the relationship between compensation and ownership structures, especially unique ownership structures, which have never been studied yet. This may help policy makers to create mechanisms for linking compensation to company performance while maximizing the wealth of a company's minority shareholders, rather than the wealth of the group and its controlling shareholders.
c. Measuring risk for bonds and stocks in control pyramids
There are many reasons why financial leveraging is the focus of much economic debate. Many traders price capital share and bonds of parent companies and subsidiaries in business pyramids based on a number of elements: accounting reports, simplified financial models based on statistics, assumptions and speculations.
The theoretic model developed in this study can serve as an academic means to objectively assess pricing and risk measurement in corporations that constitute pyramids. This theoretic model can serve as a tool for assessing the prediction capability of the market regarding future risks in parent companies and subsidiaries that form part of control pyramids. This study will contribute to the knowledge base which serves to create regulation, so as to examine new ways to protect the investing public and create policies limiting the ability of controlling shareholders of control pyramids to issue bonds.
9. Examples for assessing ongoing analyses from 2012
a. Development of debt settlement agreements in Israel in 2008–2011
The credit crisis which hit world markets in 2008 affected the Israeli corporate bond market as well. A large number of publicly traded companies ran into liquidity difficulties and were unable to repay their debts, inter alia, as a result
10 8 of their bonds' terms. As a result, beginning in 2009, a growing number of companies have initiated bond settlement proceedings with their bondholders.
In order to follow developments in bond settlement agreements, the department collected a variety of data in order to assess – on an ongoing basis, using statistical tools – these agreements' characteristics (industries, ratings, size of banking and non banking debts, type of procedure, etc). This long term study will focus on the following issues as well: economic valuations of arrangements, institutional investors' behavior and involvement in arrangement procedures, event studies focusing on announcements regarding the beginning of debt settlement procedures, formal announcements regarding arrangement agreements, etc.
b. Bond issues by Israeli companies in 2009-2012
The Department is following the development of corporate bond issues in 2009-2012 in order to examine the market's speed of recovery the credit crisis reached its peak in 2008, in order to assess the likelihood of a credit crunch recurring. We are conducting an in depth analysis of characteristics of companies that have successfully raised funds in the corporate bond market during these years and their offerings.
As part of the study, the Department is collecting data in order to characterize issuing companies, such as ratings, level of leverage, industry, as well as information on the offerings and the level of protection offered to investors – proceeds, collaterals, loan covenants for bonds and banks, etc.
c. Monitoring the secondary bond market
Since the 2008 credit crisis, the Department has been monitoring the secondary bond market and analyzing its many facets, including: analysis and segmentation of the secondary market in terms of ratings and industries; assessing linkage types and bond characteristics; return margins from publicly traded bonds' curve as compared to international markets. These data serve for mapping and predicting bond market risks.
In addition, these analyses serve as warning signs as well as for identifying pitfalls in the bond market, and serve as a basis for studies conducted by the Department.
10 9 VII Investigations, Intelligence and Trading Control Department
In September, the Investigations and Intelligence Department was unified with the Trading Control Unit, becoming the Investigations, Intelligence and Trading Control Department. The Investigations, Intelligence and Trading Control Department (hereinafter – the Investigations Department) strives to increase deterrence and enforcement and streamline the handling of investigation cases and administrative proves, as well as to ensure proper trading. During 2012, the Investigations Department identified and investigated events related to securities trading in institutional accounts, in which officers or employees of said entities conducted activity suspected as securities fraud, for personal gain. In addition, the Department identified and investigated events where individuals related to controlling shareholders of publicly traded companies conducted securities actions suspected as securities fraud. In 2012, the Department began conducting administrative probes and forwarding its findings to the ISA's Chairman, who is charged with deciding whether to pursue an administrative proceeding. The probes dealt with various administrative violations, including suspected securities frauds, prospectus disclosure violations and violations of the Investment Advice Law. As part of the ISA's globalization strategy, the Department continued, during the reporting year, to respond to judicial inquiries submitted by foreign authorities, under treaties which the ISA is a party to. In addition, the Department continued its collaboration with the Information Technology Department, as well as with other enforcement entities, for the purpose of fighting economic criminal activity.
Table 23: Distribution of investigation files forwarded to the Investigations Department in the past five years, by type of violation
Type of Violation 2008 2009 2010 2011 2012 Total Securities fraud 2 4 4 4 5 19 Use of inside information 2 6 2 4 - 14 Inclusion of misleading information (in 5 4 7 1 - 17 prospectuses, financial statements or immediate reports) Delinquent filing or non-filing 1 - - - - 1 Judicial inquiries 7 9 13 6 6 41 Violations by employees of Stock Exchange - - - - 1 1 members and prohibited acts by a licensed investment portfolio manager Violations under the Joint Investment Law - 1 - - - 1 Violations under the Penal Code: bribery, - 2 1 2 - 5 theft, obtaining by fraud
11 0 48 49 50 Total 17 26 27 17 12 99
Table 24: Cases where it was decided whether or not there was sufficient prima facie evidence that an offense had been committed, in the past five years Year Cases with insufficient Cases with sufficient Total prima facie evidence of prima facie evidence offenses of offenses
2008 4 16 2051
2009 0 12 1252
2010 3 9 1253
2011 1 14 1554
2012 0 3 56 355
Total 8 54 62
48 These data include three files which have been split off existing cases. 49 These data include one file which has been split off an existing case and do not include administrative probes opened during the year. 50 These data do not include judicial inquiries opened this year.. 51 These data do not include two cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 52 These data do not include seven cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 53 These data do not include 11 cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 54These data do not include seven cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 55 These data do not include nine cases of judicial inquiries forwarded to the ISA Chairman requested by a foreign country, the findings of which were delivered to the foreign agency. 56 These data do not include ten cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency.
11 1 Table 25: Distribution of investigation cases forwarded to the District Attorney's Office in the past five years, by main type of violation type of violation Type of violation 2008 2009 2010 2011 2012 Total
Securities fraud 4 3 3 1 3 14
Use of inside information 6 4 4 3 2 19
Inclusion of misleading 4 4 3 2 3 16 information (in prospectuses, financial statements or immediate reports)
Investment Advice Law - - - - 1 1 violations
Delinquent filing or non-Filing 1 - - - - 1
Violations under the Penal 2 2 3 3 3 13 Code: bribery, theft, obtaining by fraud57
Offenses under the Joint 1 - 1 - - 2 Investment Trust Law
Total 18 13 14 9 12 66
Table 26: Administrative probes transferred to the Investigations and Intelligence Department, by type of violation, in the past two years Type of violation 2011 2012
Violations of the Investment Advice Law 1 2
Violations of the Securities Law 3 5
Total 4 7
57 All Penal Code violations were included in a single category.
11 2 Table 27: Distribution of administrative probes forwarded to the ISA Chairman this year, by main type of violation
Type of violation 2012
Use of inside information 3
Violations of the Securities Law 1
Misleading detail in a prospectus 2
Violations of the Investment Advice Law 3
Total 9
As of the end of the reporting year, the Investigations and Intelligence Department has 12 pending cases, where investigation is still ongoing and one pending administrative case. In addition, two judicial inquiries are still pending
Trading control unit
The trading control unit has two functions: (1) ongoing control and supervision over trade on the Stock Exchange, with the purpose of ensuring fair and proper trading; (2) identifying irregular trading activities both on and off the Stock Exchange, which may point to violations of the Securities Law. Suspicious cases are forwarded to the Investigations and Intelligence Unit. During the reporting year, the Department developed new algorithms for the purpose of conducting complex analyses for identifying irregular trading behavior through the Business Intelligence system.
11 3 VIII Department for Supervision over the Stock Exchange and Trading Platforms
1. Supervision over the Stock Exchange
a. The Department coordinates the ISA’s supervision and control over the proper and fair management of the Tel Aviv Stock Exchange. The Department’s powers stem from the provisions of the Securities Law, especially Chapter H of the Law, which deals with the ISA’s powers regarding setting the Stock Exchange’s Rules & Regulations and its directives as well as its duty to supervise, as aforesaid, the Stock Exchange’s proper and fair management.
b. The Department supervises the Stock Exchange's clearing house, as defined under Section 50a of the Law, in order to ensure its stability and efficiency. For this purpose, the Department assesses, inter alia, whether the clearing house has met its requirements under international standards.
c. The Department ensures that supervision over Stock Exchange members focuses on material issues, by using adequate methods and audit tools, so as to minimize lapses and risks embodied in members' activities.
d. The Department's representatives participate in meetings of the Stock Exchange's board, clearing houses and various committees, serving as observers.
e. Changes in the Stock Exchange Rules and Regulations and their provisions – as part of the ISA's supervision over the proper and fair management of the Stock Exchange, the ISA's recommendation to the Minister of Finance is required for any change made in the Stock Exchange Rules and Regulations. Thus, the ISA discussed and approved the Stock Exchange's proposals to amend its provisions, and recommended the adoption of amendments to the Exchange's Rules and Regulations, as follows:
1. On March 7, 2012:
The ISA approved an amendment to the price list (appendix to the provisions) regarding T+1 clearing of stocks and mutual funds units and regarding clearing fees of repo transactions.
The ISA approved temporary provisions under Section 46a of the Law regarding suspension of trading due to a company event.
The ISA recommended to the Minister of Finance to revise the Rules and Regulations, while approving an amendment to the provisions regarding listing debt certificates and conditions for delisting.
The ISA recommended to the Minister of Finance to amend the Rules and Regulations regarding listing of new companies in lieu of listed companies.
The ISA recommended to the Minister of Finance to amend the Rules and Regulations, while approving an amendment to the provisions regarding managing IT in non banking members (NBMs) of the Stock Exchange.
11 4 The ISA approved amendment to provisions regarding change of terms and conditions of debt certificates – following a temporary provision concerning handling of bond settlement agreements as part of the listing provisions.
The ISA approved an amendment to provisions regarding calculating X rates for partial redemption of bonds.
The ISA approved the amendment of a price list (appendix to the provisions) regarding amendment to price list on information regarding corporate reports.
2. On May 9, 2012:
The ISA approved temporary provisions under Section 46a of the Law regarding minimum price for a stock.
The ISA approved an amendment to provisions regarding maximum value of collaterals for financial assets.
The ISA approved an amendment to provisions regarding scaled handling fees of requests to alter terms and conditions of debt certificates.
The ISA approved an amendment to provisions regarding auditors and responsible accountants for NBMs.
The ISA approved an amendment to provisions regarding monthly reporting of NBMs to the Stock Exchange.
3. On June 17, 2012:
The ISA approved an amendment to provisions regarding reports to NBM clients.
The ISA approved an amendment to provisions regarding a new company's stock price without a public offering.
The ISA approved an amendment to provisions regarding a mechanism for avoiding sharp stock price fluctuations.
The ISA recommended to the Minister of Finance to amend the Rules and Regulations regarding a change in the definition of "First Class International Bank".
The ISA recommended to the Minister of Finance to amend the Rules and Regulations regarding amendment of rules for temporary suspension of trading of a security.
The ISA approved an amendment to provisions regarding removal of limit on the number of orders for continuous trading in derivatives.
11 5 4. On September 3, 2012:
The ISA recommended to the Minister of Finance to amend the Rules and Regulations, while approving the amendment to provisions regarding listing of exchange traded notes (ETNs).
The ISA approved an amendment to the provisions regarding private placements.
The ISA approved an amendment to temporary provisions under Section 46a of the law regarding a minimum price for a stock.
The ISA approved an amendment to provisions regarding an additional cause for removal of securities from the low volume securities list.
The ISA approved an amendment to provisions regarding reports to clients with non tradable warrants, which were allocated to them as part of an employees' option plan.
The ISA approved the extension of temporary provisions under Section 46a regarding definition of a limited partnership project for oil and gas explorations.
The ISA approved an amendment of provisions regarding changing trading units and setting maximum sizes for rights orders.
The ISA approved an amendment to the price list (appendix to the provisions) regarding clearing fees of repo transactions.
2. Trading platforms
The Department is promoting a legislative draft for Securities Regulations (Trader's Own Account) of 2011, concerning regulation of own account trading platforms. The Department's staff is working on completing the legislative procedures and regulating the trading platform field and is preparing for the beginning of supervision and licensing procedure.
Regulatory activities – the legislative draft includes the following:
a. Request for license
Requirements for reporting and providing information: A company requesting a platform license is to include in its application a report which includes, inter alia, the following: (1) A report following the format of annual financial statements filed by public companies; (2) An additional information report, which includes various representations regarding the applicant and its controlling shareholders; (3) Proposed rules regarding information about financial instruments the company wishes to trade in.
b. Level of leverage
Leveraged investments enable investors to invest much greater amounts that they actually invest. The ratio between the transaction's nominal value and the value of
11 6 the collateral which the client will be required to post will be no greater than a certain ratio, and the client's loss will not exceed the collateral amount.
c. Conflict of interests
Conflicts of interests between such companies and their clients are inherent, since they constitute counter parties. In other words, they purchase from their clients for their own accounts or sell to their clients from their own accounts. Thus, companies will be required to have a conflict of interests policy in place, which will include all types of possible conflicts of interests inherent in their activities as well as procedures aimed at overcoming such conflicts of interest. In addition, companies or their representatives shall be prohibited from providing advice, marketing and portfolio management services for financial instruments.
d. Handling client funds
Clients' funds and assets shall be held in trustee accounts that are separate from company assets, related parties and interested parties. Companies will be required to deposit their clients' funds in banks or financial institutions outside Israel. Regarding financial institutions outside Israel – rating requirements were set, and each company was required to assess their credit risk.
e. Reporting
Companies shall file annual reports in the licensing application format, a quarterly report in a format which applies to public companies, as well as a monthly report, which will mainly include information regarding meeting prudential model requirements. In addition, companies will be required to report information regarding profitable and losing accounts, scopes of activity, credit risks and market risks. In addition, the regulations prescribe immediate reporting requirements.
f. Prudential requirements
Minimum equity, liquid assets and insurance: The minimum required equity is derived from various financial risks embodied in the activity of a platform, such as credit, market and liquidity risks as well as operational risks. The purpose of the model for calculating the minimum equity requirement is to incentivize platforms to minimize risk exposure.
g. Other
Requirements regulating engagements with clients; documentation and record keeping; adjusting activity to client characteristics; companies' advertising and marketing and their reporting system.
3. Brokers and dealers
Under existing law, the activities of most capital market financial intermediaries are regulated and supervised by various regulators, either directly or indirectly. However, some of the activities and intermediaries are not regulated under law or supervised directly. Thus, for example, the activities of brokers (i.e. – those performing transactions on behalf of another), dealers (i.e. – those performing transactions for others with the dealer's own account), and custodians (i.e. – those providing custody services to clients'
11 7 assets) lack extensive, direct and comprehensive regulation, and the concern is that clients are insufficiently protected. The Department is drafting a legislative framework for thorough regulation of broker dealer activities, as is the case worldwide, and is preparing a legislative framework which would apply to brokers, dealers and custodians. The provisions of the legal framework will require intermediaries to register or obtain a license, and their activity will be regulated and supervised by the ISA. In addition, requirements will be prescribed regarding disclosure and fiduciary duties.
11 8 IX Legal Counsel
1. Legal Counsel - Responsibilities
The Legal Counsel Department has two primary responsibilities:
a. Legal counsel concerning the ISA’s operations and supervisory powers
In this role, the Legal Counsel Department provides legal advice on questions of policy and broader decisions on certain industries or topics (such as proposed legislation and interpretation of statutory provisions affecting either the entire market or specific sectors). The Legal Counsel Department also provides legal advice on specific decisions which the ISA is required to make in sensitive matters, such as enforcement decisions concerning supervised entities. In addition, the Legal Counsel Department promotes key ISA projects.
In addition to providing legal counsel to the ISA Plenum, its committees and the ISA Chairman on matters brought before them, the Legal Counsel Department provides legal support for the various ISA departments, and conducts internal control over their operations, guaranteeing that these operations are in keeping with the ISA’s powers and policies.
When necessary, the Legal Counsel Department collaborates with third parties (such as other regulators, the State Comptroller, etc.), and is involved in legal proceedings to which the ISA is party. These include both criminal and civil proceedings, including class actions and/or derivative actions, administrative proceedings, etc. The Legal Counsel department also provides training for legal professionals in the ISA, and participates in various professional forums outside the ISA.
b. Organizational legal counsel
In this role, the Legal Counsel Department provides legal counsel to the ISA as an organization, similar to legal counsel departments in other companies or public authorities. However, these services are uniquely suited to the ISA's structure, its powers, and its potential legal exposure. The ISA has grown significantly in recent years, both in the number of employees and in the scope of its operations. Thus, the ISA must handle an ever increasing number of questions of a general legal nature, such as tendering laws, labor laws, etc.
2. Key Activities in 2012
In 2012, the Legal Counsel Department was involved in key far-reaching ISA activities, in addition to its ongoing activities such as revising procedures, answering pre-ruling inquiries or no-action letters, managing legal proceedings to which the ISA is party, or applications for funding of class actions. In these matters and others, the Legal Counsel Department also supported the various ISA departments. The key initiatives in which the Legal Counsel Department was involved in 2012 were as follows:
11 9 a. The ISA’s goals and strategy roadmap for the coming years and regulatory review
In September 2012, the ISA issued a roadmap - a document detailing its goals and strategy (“Goals and Strategy Document”) for the coming years. The Goals and Strategy Document is based on three pillars: regulation, de-regulation (i.e. - allowances made to supervised entities), and capital market development. These goals were formulated according to the ISA’s fundamental principles of balance, proportionality, transparency, enforcement, and deterrence. The first part of the Document details key projects, which the ISA plans on promoting in the coming years, including projects aimed at developing the capital market. These projects include:
Regulation of currently unregulated sectors - such as supervision of auditing accountants (PCAOB); broker-dealers; trading floors; general investment advice (analysis); rating agencies; regulation of the ETN market - transition from reporting requirements to supervisory requirements; consultation to institutional entities.
Changes and licensing in the underwriting market - portfolio managers; investment consultants; and investment marketing.
Regulation of reporting corporations - such as improving reporting quality and brevity; resolving the bond market crisis - debt settlement agreements; tests and criteria for dividend payments; a disclosure model for dual-listed companies issuing bonds only in Israel.
Enforcement and deterrence on the capital market - such as administrative enforcement activities; prohibition of front-running; corporate governance in TASE operations; systemic risk; and financial education.
The roadmap gives a brief description of each of these projects.
The ISA considers the capital market in Israel an important driver of economic growth and a crucial tool in efficient resource allocation in the economy. Therefore, the ISA has set the development of this market as a central goal in its long-term strategy, and has initiated the following key projects: promoting investment in public research and development companies; At the Market Offering; an internet voting platform; mutual recognition of prospectuses and filings; securitization; leveraged ETNs; ETFs; foreign funds; reduction of distribution fees; alternative distribution platform; increasing competitiveness in the brokerage market; improving the offering consolidation and clearing process.
In addition, in light of increased capital market regulation in recent years and the ongoing crisis affecting the capital market, the ISA has decided to allocate additional resources to thoroughly examining those regulations with which it is entrusted. This regulatory review seeks to identify possible allowances for supervised entities, while protecting investor interests. Following this review, in the latter half of the roadmap the ISA issued an outline for regulatory allowances. This roadmap was also issued for public comments by December 1, 2012. The roadmap includes a series of allowances which the ISA is considering in its principle supervisory activities, on three levels:
1) Allowances for all supervised entities - The ISA is considering a series of legislative amendments, including removal of various redundancies in disclosure requirements; standardization of report categories; and increasing legal certainty concerning
12 0 statutory requirements. The ISA is also proposing allowances in those places that it has identified that an unnecessary burden exists for supervised entities. Allowances have been carefully selected, while upholding the ISA's duty to protect the investing public. From among the dozens of allowances currently being considered by the ISA, the following key allowances should be noted: Reporting companies - extending the period for offering securities under a shelf prospectus from 24 to 36 months, and repealing various disclosure requirements prescribed by the financial reporting regulations which have been made redundant following the application of International Financial Reporting Standards (IFRS). Trust funds - repealing the future requirement that funds file IFRS-compliant financial statements, so that the present mode of preparation will remain unchanged, and increasing the threshold for defining material transactions requiring review and approval by a fund’s board of directors. ETNs - keeping monetary reporting at the ETN manager level, so as to avoid separate financial statements for each ETN; completing the transition of ETNs to regulation under the Joint Investments in Trust Law; and allowances in the marketing and advertising of ETNs. Licensees (investment advisors, investment marketers and portfolio managers) - re-examination of the ISA directive for clarifying client needs so as to facilitate shorter and more effective clarification processes; repealing the requirement that process documentation be submitted immediately; and reducing the frequency of client need updating, so as to apply once every two years and not once a year.
2) Allowances for small companies - As part of its regulatory review initiative, the ISA examined whether it is possible to create a regulatory hierarchy differentiating between larger and smaller supervised entities, in addition to the current hierarchy prescribed by law. Considering the characteristics of the capital market in Israel, including the existence of numerous small (or very small) companies and the lack of sufficient market mechanisms for voluntary enforcement of high standards, the ISA believes that setting different rules based on company size should focus on those few cases where this parameter is likely to adequately reflect the nature of the company and the needs of investors in that company. This approach corresponds with the material distinctions made under the current regulatory regime for supervising reporting entities.
In light of the above, the roadmap issued for public comment included a number of allowances for small reporting companies and small portfolio management companies. The principle allowances currently being considered for small reporting entities are as follows: repealing the requirement to issue a report on internal controls (iSOX) and auditor reports on internal controls in small companies, and exempting these companies from the Second schedule to the Periodic and Immediate Reports Regulations concerning analysis of market risks ("Disclosure Report") where their exposure to financial instrument-related risks is low. With small portfolio management companies, the ISA is considering the following principle allowances: repealing the ISA directive for clarifying client needs (so that only the statutory requirement would apply), and reducing client need update requirements so as to apply only if the licensee learns of material changes affecting the client. As concerns reporting entities, questions concerning what defines a "small company", the establishment of a separate trading list for small companies, and the manner of approving the selection of allowances for small companies have also been submitted for public comment.
12 1 The roadmap includes additional allowances concerning the offer of securities to the public. These additional allowances seek to make things easier for very small companies seeking exemption from current regulation under the Securities Law. In this regard, the ISA is considering the following actions: expanding the exemption from prospectus publication requirements for "small" public offers; issuing clarifications concerning permissible referrals for identifying competent clients; and examining a model for small-scale public fund-raising based on the new American model of crowd funding. Furthermore the ISA has established an inter-departmental team for reviewing specific allowances for research and development companies, in light of the nature of their operations and unique investor needs in these companies, and the potential of these operations in the Israeli capital market.
3) Changes in ISA activities - As part of its work towards increasing transparency and efficiency, the ISA has initiated a number of changes in its work flows, including: (a) Increasing public involvement in legislative processes - the ISA published a formal procedure with rules for managing ISA-related legislative processes. The procedure stresses that an effective right be given to the public to voice its opinions in the legislative drafting process, prior to such legislation being submitted to the Knesset. This procedure will formalize existing practices under a clearer operational framework; (b) Starting date of new directives - the ISA intends to prescribe and publish rules which will assist supervised entities in efficiently and effectively implementing new requirements; (c) Timing of ISA publications to supervised entities - the ISA is examining, over a trial period, the possible consolidation of new publications in pre-determined batch publications, on such dates as shall be determined by the ISA. This initiative seeks to assist supervised entities in remaining aware of, and implementing publications.
The Legal Counsel Department was involved in drafting the roadmap document, and in the coming years will take action to implement and realize the projects detailed in that document, and particularly to continue development and application of regulatory allowances.
b. Administrative enforcement and monetary sanctions
In the reporting period, an Administrative Enforcement Committee has been established under the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments) of 2011, and the regulations, provisions and directives issued thereunder. As of the reporting date, the ISA has published two administrative enforcement decisions on its website, as well as two administrative enforcement settlements. As part of the ISA's policy of instituting transparency in its operations, the ISA has issued a document specifying criteria for allocating cases to either the criminal or administrative enforcement. This document details the ISA’s policy and considerations in this matter.
Furthermore, the ISA has continued instituting monetary sanction proceedings against entities supervised by the Corporate Finance Department and the Investment Department. 2012 also saw an expansion of the ISA's powers to impose monetary sanctions, so that these powers now also apply to various violations of the Companies Law of 1999, pursuant to Amendment 16 to the Companies Law.
The Legal Counsel Department takes part in determining the ISA’s position and criteria in legal and other issues concerning these matters
12 2 c. Increasing legal certainty
Legal certainty is one of the cornerstones of a modern economy, and refers, inter alia, to providing supervised entities with clear conduct requirements, minimizing aggregate costs, and is a pre-requisite for efficient and fair enforcement. As such, the Legal Counsel Department examines the various means employed in Western countries to achieve legal certainty in capital markets, compares these to the means applied by the ISA in Israel, and adopts relevant means so as to maximize legal certainty. In its endeavor to increase legal certainty, the Legal Counsel Department has promoted and accompanied various publications, including ISA position papers on various topics, no-action letters, pre-ruling inquiries, safe harbor guidelines, criteria for allocating cases to either criminal, or administrative enforcement, and more.
d. Key legislative initiatives
The ISA is currently pursuing dozens of legislative initiatives. Of these, the Legal Counsel Department provides close support for initiatives involving primary regulation of a particular industry, or which include extremely material changes to existing regulation. Thus, for example, the Legal Counsel Department supports the following ISA initiatives: regulation of rating agency operations; adjustment of analyst regulation; a proposed reform in the underwriting industry; development of an online voting platform; submitting the ETN market to regulation under the Joint Investments in Trust Law; reducing distribution fees for investors in mutual funds; etc.
e. ISA emergency readiness
In 2012, the Legal Counsel Department remained involve in promoting the ISA’s emergency readiness infrastructure. This includes drafting procedures for the ISA and its various departments for times of emergency; review and preparation for various scenarios which apply to the ISA's role in the capital market; participation in emergency readiness drills conducted by the State; and more.
3. Coordinating and Supporting Civil Suits
The ISA is party to several civil suits. In general, the State Attorney’s Office represents the ISA in court, an a significant part of preparations for submitting a case to the State Attorney is carried out by the ISA, in collaboration with the State Attorney.
a. Civil suits to which the ISA was party in the past year and/or which are still pending decision in court
1) Supreme Court Case 3803/11 Israel Capital Market Trustees Association; Supreme Court Case 4694/11 Association of ETNs in the Tel Aviv Chamber of Commerce and Association of (non-bank) TASE Members; Supreme Court Case 5437/11 Mutual Fund Managers Association vs. the State of Israel, the Minister of Finance, the ISA, the Israeli Knesset and the Minister of Justice
In early 2011, shortly after the publication of the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments), 2011, concerning administrative enforcement, three administrative petitions were filed for a conditional order. These
12 3 petitions relate to provisions prescribed in the aforesaid Law, mainly those prohibiting indemnification and insurance, the appeals process prescribed by the Law, and the monetary sanctions mechanism. The three petitions were heard together, and on February 5, 2012, the Hon. Deputy-President A. Rivlin handed down the court’s decision in the case. As the Administrative Enforcement Law has yet to be implemented, any damage to the plaintiffs’ rights is distant and theoretical in nature, the court decided to dismiss the petitions.
2) Supreme Court Case 8136/11 Mutual Fund Managers Association vs. the Minister of Finance and the ISA
The petition was filed against Amendment 19 to the Joint Investments in Trust Law. The amendment concerning the publication of prospectus covers in the press and was enacted following a private bill passed in the Knesset against the ISA's recommendation. Following the court’s recommendation, the plaintiffs withdrew their petition, and the ISA announced that, after a suitable amount of time has passed, if the legislation is found to be redundant for regulatory purposes, the ISA will initiate - through the Ministry of Finance - suitable legislation to remedy the situation.
3) Miscellaneous Civil Appeal (Tel Aviv) 25968-03-1 State of Israel vs. Jane Doe et al.
An appeal to the Tel Aviv District Court by a licensed corporation, a senior investment advisor, and a client portfolio manager in that corporation (“the Appellants”). The appeal contests a decision by the Disciplinary Committee pursuant to the Regulation of Investment Advice and Investment Portfolio Management Law, 1995 (in this paragraph - "the Disciplinary Committee", and "the Law") to convict them of disciplinary violations under the Law. The Disciplinary Committee decided on their conviction after determining that the Appellants themselves, by force of organic theory of corporations or by force of agent liability, performed these offenses through improperly advising a client, which led the client to incur losses.
The Court heard preliminary arguments (limitation and delay), defense arguments (“minor infringements”, and “equitable defense” due to selective enforcement). The Court referred to two questions: first - the law which applies to the Appellants’ actions. The Court was required to clarify this issue since the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments), 2011 (“the Administrative Enforcement Law”) repeals the various disciplinary violations, and instead defines administrative violations. The amendment came into effect after the Disciplinary Committee's decision, but prior to the appeal being heard; second – does the Law apply to consultations, where the advice was not given by a licensed individual, and the recommended product is not among those assets covered by the Advice Law.
The Court ruled that the change in the Law, in the definition of the violation and in the sanctions prescribed for such violation is not merely technical, and since the new Law is a key piece of legislation and more lenient than previous legislation, the provisions of the Administrative Enforcement Law shall apply. The Court also ruled that the Disciplinary Committee was right in determining that the client was given “investment advice”, even though the portfolio manager appointed for that client was not an investment advisor, and despite the fact that the product purchased by the client is not subject to the Advice Law. The reason for this decision is that advisory services are given in unison, with products subject to the Law being offered
12 4 alongside the product not subject to the law. These various products were offered without proper disclosure that the product and advice concerning that product are not subject to the Law. Therefore, the advisory services must generally be considered to be subject to the Law.
Concerning the various Appellants’ liability, the Court ruled as follows: the Law states that investment advice can be given "directly or indirectly". The client portfolio manager's actions constitute “indirect advice”, since he received preliminary information concerning the client’s intentions, assumed overall responsibility for that client, supported the advisory process, was presented to the client as the person who will be handling his affairs. Therefore, as far as the client was concerned, the portfolio manager constitutes an investment advisor. Furthermore, as a licensed individual, the portfolio manager should have verified that the services meet the client's needs. Thus, the portfolio manager's failure to fulfill his duties justifies his legal liability. The company is licensed to manage portfolio and provide investment advice, and employs the portfolio manager who was found liable for the violation, and in any case its actions could only have been carried out through its employees, provided that they are licensed portfolio managers. The senior advisor, who is liable as a senior executive and officer of a company, who is liable for violations of the Law as he had both the authority and the power to prevent the violations from occurring. Furthermore, in light of the fact that the ruling overturned the enforcement decisions concerning the violations, the fines prescribed for the company and the client portfolio manager were reduced.
4) Originating Motion 3655-07-11 Hermetic Trusts (1975) Ltd. vs. MBM Acquisition Inc. et al.
An originating motion filed by the Economic Division with the Tel Aviv District Court, concerning the interpretation of Section 52N1 to the Securities Law - the status of debt certificates held by a controlling shareholder in a company after the sale of his shares in the company to a third party. The ISA was included in these proceedings and submitted its position on the dispute and the interpretation of this section to the Law, as the government body entrusted with regulating the capital market and safeguarding the interests of debt certificate holders. In short, the ISA was of the position that the application of that section's provisions to debt certificates purchased by a controlling shareholder does not end when the controlling shareholder sells control to a third party, when a company is experiencing difficulties. The Court rejected the originating motion at the start of the reporting year, did not accept the ISA’s position, and so an appeal was made to the Supreme Court, which is still pending as of the end of the reporting year.
5) Alan Spas Ltd. vs. Bezeq Ltd. and the ISA
These proceedings started prior to the reporting year, and pertain to an application filed by Bezeq to distribute dividends under Section 303 to the Companies Law, while reducing the company’s equity. The ISA was party to the Court hearings and submitted its response in some cases as requested by the Economic Division of the Tel Aviv District Court. In short, the ISA was of the position that when the company’s board of directors resolved to distribute dividends through installments paid over a certain period, and when the aforesaid does not meet the requirements of the profit test, the board of directors must exercise judgment in order to assure that the company complies with its solvency requirements as stipulated in the Companies
12 5 Law prior to each individual distribution. The board of directors cannot suffice with an examination made prior to its original decision to distribute dividends in installments. The Court approved the requested distribution, while making material decisions concerning the manner of effecting such distribution. Civil Action 48067- 01-11.
6) IEL Israel Equity vs. Tadbik Ltd. et al.
An originating motion filed with the Economic Court in Tel Aviv, concerning a dispute between shareholders, and disqualifying the votes cast by minority shareholders in general meeting on the grounds that they have “negative personal interests” in the results of that vote. The ISA appeared before the Court and stated, in short, its position that the company’s management should not be allowed to disqualify votes cast by minority shareholders on the grounds that they have “negative personal interest”. At the least, the controlling shareholders claiming flaws in the judgment of the minority shareholders as aforesaid should have appealed to the competent court, requesting suitable relief. The Court accepted the application for temporary relief, whereby the Court was asked to prevent the summons of a general meeting until a decision is made on the disqualification of the votes cast by minority shareholders (the Applicants). At the start of the reporting year, applications were filed by the Respondents (the company and its controlling shareholders) for permission to appeal to the Supreme Court. The application included a request for temporary relief, whereby the Supreme Court was requested to determine that the company’s CEO should be paid a salary equal to his salary prior to the start of the dispute or at such different amount as shall be ruled by the Court. The ISA submitted its position in writing to the Supreme Court. The case is currently pending decision.
7) Meir Lipshes et al. vs. Arad Investments and Industrial Development Ltd. et al.
An action brought before the Economic Court in Tel Aviv, concerning the question of what happens when a public company (in this case, the subsidiary) does business with a controlling shareholder who holds it through another public company - the parent (indirect holdings), and the transaction is submitted for approval by the subsidiary ("the Contracting Company" or "the Controlled Company"), pursuant to Sections 270(4) and 275 to the Companies Law, 1999 ("the Companies Law"). Under these circumstances, are the organs of the public parent, who controls the subsidiary, and which itself is controlled by the controlling shareholder ("the Controlling Company") also required to approve the transaction pursuant to these sections? The ISA submitted its position to the Court, whereby since the transaction is between the controlling shareholder in the parent and a public company controlled by another public company (as opposed to a transaction between a controlling shareholder and a private company controlled by the public parent), then the principle logic behind Sections 270(4) and 275 to the Companies Law no longer holds. This is due to the fact that the controlled public company - which is directly involved in the transaction - is independently subject to the approval requirements of Sections 270(4) and 275 to the Companies Law. Therefore, in general, there is no concern that the statutory mechanism prescribed in these sections will be circumvented, and there is less concern that transactions not benefiting the public company will be approved. The Court accepted the ISA's position, and dismissed the suit in the reporting year. Civil Action 55366-11-12.
12 6 8) Civil Action 35357-06-12 Shif Hazenfratz Trustees (2004) Ltd. vs. Oren Investments (AAA) Ltd. et al.
In this case, the Court was requested to order the extension of the first preservation period of the Applicant’s securities. The District Court rejected the application. An appeal was filed with the Supreme Court (Civil Appeals Application 839/12). The ISA supported the TASE's position, and emphasized the importance of keeping to the dates prescribed in the TASE rules and regulations, including the transition date of trading in a company's shares, from the first to the second preservation year, and the date on which a company is delisted, all pursuant to the trading rules on the TASE. The Supreme Court accepted the TASE and the ISA’s position, and denied the application for permission to appeal
9) Ranan Gerst vs. Ilik Rozenski and the Tel Aviv District Attorney’s Office (Taxation and Economic Affairs)
In this case, as part of a class action against officers of Delek Real Estate Ltd., the ISA was requested to provide materials collected as part of a criminal investigation. The ISA submitted its position, whereby in light of the stage of the criminal investigation against the respondent in the application for approval as a class action, the court should deny the request that an order be issued prior to the possible indictment of the respondent. Concerning the applicant’s alternative request, the ISA stated that it shall favorably consider a request for examining documents in its possession, should any such request be submitted to the ISA following the hearings stage of the case. Civil Action 52310-11-11.
10) B. Yair et al. vs. Goldphone Ltd.
A series of proceedings at the Jerusalem District Court and appeals to the Supreme Court, concerning a dispute between shareholders and disqualification of votes cast by minority shareholders in general meeting on the grounds that they have “negative personal interest” in the results of the vote. The ISA responded to some of these proceedings, and inter alia expressed its position that the company’s management should not be allowed to disqualify votes cast by minority shareholders on the ground that the latter have “negative personal interest”. At the very least, the controlling shareholders claiming flaws in the judgment of the minority shareholders as aforesaid should apply for suitable relief from the competent court of law. The parties in the case reached a settlement agreement, and all proceedings were stopped at the end of the reporting year.
11) Queenco Leisure International Ltd. vs. Wesenta Investments et al.
An originating motion concerning a dispute on the duty of private companies to provide financial data and/or financial statements so as to meet their disclosure requirements if they are a reporting entity. The ISA submitted its position stating, inter alia, that the Court must accept the application and order the respondents and/or any person acting on their behalf (the private companies) to provide the applicants with their financial statements (quarterly and annual) on time, with such statements prepared according to one of the methods permitted by law. The ISA was also of the opinion that the Court must instruct the respondents to provide the applicants all financial data and/or other material information pertaining to their business and commercial activity and/or those of indirectly held entities, which may
12 7 be required under their statutory disclosure requirements. As of the end of the reporting year, this case was still pending decision. Originating Motion 34811-06-12.
b. Actions concerning civil fines and monetary sanctions under the Joint Investments Law, the Advice Law, the Prohibition of Money Laundering Law, and the Securities Law
Bet Shemesh Engines vs. the ISA
An administrative petition against the ISA Fines and Sanctions Committee decision, which imposed a monetary sanction on the petitioning company pursuant to Sections 52O and 52R to the Securities Law. These sanctions were imposed due to a violation of the petitioner’s disclosure requirements under Section 36 to the Securities Law and Regulation 34(B) to the Securities Regulations (Periodic and Immediate Reports), in connection with the appointment of an outside director in the company. The Court accepted the petition under Administrative Petition 30045- 02-12, and so the ISA appealed to the Supreme Court. The ISA’s main arguments in the appeal are that the lower instance court erred in its decision by stating that the company was not required to disclose the appointment of the outside director; erred in its limited interpretation of the phrase “failed to report”, so as not to include erroneous or misleading reports; and erred in the manner in which it applied interpretive principles from criminal procedure in this case. As of the end of the reporting year, this appeal is still pending decision. Administrative Petition 6999/12.
c. Class actions and derivative actions involving the ISA or in which the ISA submitted its position
1) Class Action 49552-02-11 Erlich vs. Forex Place Ltd. et al.
The case is a class action for NIS 500 million filed against Forex Place Ltd. and others. In short, according to the application for approval, Forex Place Ltd. deals in investment marketing, advice and management, and does not adequately disclose to its clients the risks involved in those investments. The application further argues, inter alia, that Forex Place Ltd. conceals from its clients that it is the counterparty to most of their trades, that it earns its clients' losses, and that it has conflicts of interest with its clients. The parties have filed all court documents required for an application for approval as a class action. In a preliminary hearing which took place on December 11, 2011, the Court decided to submit the arguments for review by various bodies, including the ISA, and requested their response to the statements of claim. The ISA did not express a position on the matters raised in the statements of claim, inter alia, as the ISA is still working to regulate trading floors and is focusing on the regulation of this industry. The ISA also withheld its opinion since the case was full of factual issues of which the ISA has no knowledge, since the parties have already presented the ISA's legal position as made public, and since the other legal issues are regulated under general law.
2) Civil Appeal Application 3242/11 Excellence Nessuah Investment House Ltd. vs. Menachem Fert et al.
The case involves an appeal of a decision granting an application for approval as a class action (Tel Aviv-Jaffa Court Case 1792-09). According to the applicants in
12 8 the application for approval - which was granted by the district court - Excellence violated Section 17(b)(3) of the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995, by charging group members higher fees than permitted by law. These fees were charged without obtaining client consent to Excellence’s fee reimbursement or to the rate of such reimbursement. Excellence appealed the decision to the Supreme Court, and on September 4, 2011, the Supreme Court decided to summon “an attorney on behalf of the ISA” to the appellate hearing. In the Supreme Court hearing, which took place on November 28, 2011, the parties agreed to the Court’s suggestion to pursue mediation. As of the end of the reporting year, mediation proceedings are still underway.
3) Derivative Action 32690-10-11 Rachel Gottlieb vs. Ayalon Holdings Ltd. et al.
This case concerns an application for approval as a derivative action, on the grounds that the terms of tenure and employment granted to the controlling shareholders in Ayalon Holdings Ltd. in 2002-2005 were not duly approved, and so payments made to the said shareholders for their employment in these did not comply with the requirements of law. The parties have filed an application for approval of a settlement agreement, and in June 2012, the Court asked, inter alia, for the ISA’s position. In that same month, the ISA notified the Court that, after considering the settlement agreement in detail, it does not object to the Court approving the proposed settlement. In September 2012, the Court approved the settlement agreement.
4) Class Action 14144-05-09 Harel Pia Mutual Funds Ltd. et al. vs. Landmark Group Ltd.
The case concerns an application for approval as a class action, mainly concerning a prospectus published by the Landmark Group Ltd. on May 21, 2007. This prospectus was allegedly fraught with misleading information. On March 18, 2012, the ISA submitted its position to the Court, on the following key issues: (a) applicability of the defenses prescribed under Section 33(1) and Section 33(1a) to the Securities Law on issue underwriters; (b) the importance of disclosing material indications to the value of assets, for making informed investment decisions; and (c) the possibility of fund managers filing and conducting class actions for violations of law allegedly performed by one of the corporations in which the fund invests. In the reporting year, the evidence stage and the summations stage of the proceedings ended. On December 27, 2012, the Court accepted the application for approval as concerns the grounds for the principle action.
5) Liquidation Case 54634-06-12 concerning Extra Plastic Ltd.
The case involves debt settlement proceedings under Section 350 to the Companies Law concerning Extra Plastic Ltd. ("the Company"). On September 9, 2012, the ISA submitted its position on the case to the Court. The ISA’s position mainly focused on the manner in which the Company sought to settle the class action filed in its case. The class action argued that the Company's financial statements for the second and third quarters of 2011 included misleading information. Later, the company filed an application to settle under Section 350 to the Companies Law. The settlement proposed, inter alia, that each member of
12 9 the group be required to prove its debt individually in a debt-proving process; that should members choose to do so, they will be classified as ordinary creditors and vote in the meeting of ordinary creditors according to their approved debt (should any such debt be approved); and that the class action against the Company and most of its controlling shareholders and officers shall be terminated and the arguments underlying the class action shall be muted. The ISA submitted its position, that under the mechanism proposed by the Company for resolving the class action is improper, undermines the group members’ rights, and should not be approved. In the hearing which took place on September 11, 2012, the parties reached an agreement which reflected the ISA’s position, and which was approved by the Court.
6) Derivative Action 21785-02-11 Yonatan Ben Ami vs. Menora Mivtachim Holdings Ltd.
The case involves an application for approval as a derivative action, on the basis that the actions or omissions of senior officers in Menora Mivtachim Insurance Ltd. (“Menora Insurance”) caused Menora Insurance to incur tens of millions of shekels in damages. Menora Insurance is a wholly-owned subsidiary of Menora Mivtachim Holdings Ltd. (“Menora Holdings”), and the derivative plaintiff is a shareholder in Menora Holdings. In February 2012, the parties filed an application for approval of a settlement agreement, and in March 2012, the Court requested that the ISA submit its position on the settlement agreement. The ISA was of the position that the settlement agreement cannot be approved as filed, mainly because its underlying economic rationale was unclear. Under the settlement agreement, Menora Holdings covers the bulk of the compensation on behalf of Menora Insurance, for damages which it did not cause. The application for approval did not argue that Menora Holdings harmed Menora Insurance in any way. And so the action was likewise not directed at Menora Holdings. In fact, Menora Holdings (and vicariously, its shareholders) was injured by the damages caused to Menora Insurance (as Menora Insurance is wholly-owned by Menora Holdings). However, under the settlement agreement, the inured party (Menora Holdings) shares in the cost of the compensation. The Court rejected the ISA's position, and in May 2012, the Court approved the settlement agreement.
7) Sabo vs. Discount Investments and Koor
The case is a class action concerning an alleged discriminatory rights issue. The parties reached a settlement agreement, which was submitted, inter alia, to the ISA. The settlement agreement stipulates, in short, that the Court will approve the suit as a class action for all the respondents and on all the grounds allege in the application for approval and the other documents, and will rule against Respondent 1, Discount Investments Ltd., ordering Respondent 1 to donate NIS 18 million to the public benefit. The Attorney General updated the Court of his position opposing the approval of the proposed settlement agreement. The Attorney General opposed the settlement, inter alia, on the grounds that it does not compensate group members in any way but rather aids the public in general, and since the settlement payment is covered by only one of the respondents, while the other respondents - against whom most of the arguments in the application for approval were made - do not contribute to the settlement in any
13 0 way. As of the end of the reporting year, these proceedings are still pending decision in court. Civil Action (Jerusalem) 3118/09.
d. Civil Actions against the ISA
1) Civil Action 1689/08 Mokendov vs. Porush, Terry and the ISA
A financial claim against the ISA, its former Chairman and the former Head of the Mutual Funds Supervision Department (presently a part of the Investments Department). The claim argues for damages and loss of income caused the plaintiff following the annulment of his agreement with a fund manager. The plaintiff argues that such damages resulted from actions taken by the ISA. In the reporting year, the Court gave its decision in this case. The Court stated that the ISA and persons acting on its behalf acted in accordance with the ISA’s statutory powers, and so they are entitled to their claimed defenses. As such, the Court rejected the claim. The plaintiff appealed to the Supreme Court and the case is currently pending decision.
2) Civil Action 27603-12-11 Abramovitch David et al. vs. the ISA and the Israel Police;
3) Civil Action 1470/06, 1634/06, 13989-11-10 Havitch Vladimir et al. vs. Rusneftgazinvest (Israel) et al.
Two monetary claims filed against the Israel Police and the ISA, in connection with fraud carried out by Mr. Gregory Lerner. The actions were filed by 560 citizens, alleging that approximately 2,500 citizens lost NIS 120 million in the fraud. The claims further argue that Mr. Lerner received this amount through a public offer of securities without a prospectus, in violation of the Securities Law. The plaintiffs argue that the ISA was negligent in that it knew of the violation of the Securities Law, but failed to prevent the offer, which caused the plaintiffs to incur the said damages. Due to the similarity between the two actions, the Court decided that they shall be heard together. In February 2012, the Israel Police and the ISA submitted a joint statement of defense, rejecting the arguments in one of the claims. This case is in its preliminary stages (questionnaire and document disclosure stage). As of the end of the reporting year, a statement of defense has yet to be submitted in the other claim.
4) Originating Motion 20965-08-11 Semana vs. Y. Arnon & Co. et al.
This case refers to an action (originating motion) for declaratory relief against a number of defendants, including the ISA. The Court was asked to declare that the ISA “approved” the issue carried out by Afik Hayarden Housing Gatherings Ltd. (another defendant in the case). The ISA submitted its response to the originating motion. Prior to hearing the originating motion and at the ISA’s request, the Court dismissed the actions against the ISA.
13 1 4. Funding of Class and Derivative Actions and Removal of Barriers to Private Enforcement
a. Funding of class and derivative actions
One of the ISA’s goals is to remove barriers to private enforcement and promote the filing of justified private actions. The ISA seeks to achieve this goal by providing investors with tools and creating a conducive environment for filing class actions and derivative actions. The ISA promotes such actions in light of the present situation in Israel, where private enforcement of securities laws is underdeveloped and relatively limited in scope.
One of the main tools available to the ISA in this endeavor is providing funding for securities-related class actions and derivative actions. This support is provided by virtue of the ISA’s powers under the Companies Law.
According to Section 209 to the Companies Law, the ISA may pay the expenses of a class action lawsuit, if it is convinced that it is in the public interest and there is a reasonable chance that the Court will approve the suit’s status as a class action.
According to Section 205A of the Companies Law, the ISA may pay the expenses of derivative actions if it is convinced that they are in the public interest and there is a reasonable chance that the Court will approve the suit’s status as a derivative action. It is noted that this is a relatively new power, granted the ISA in the present reporting year under Amendment 16E to the Companies Law. The ISA exercises its powers to fund class actions and derivative actions as part of its ongoing operations. Actions receiving funding from the ISA are detailed below.
It is noted that in the past two years, with the opening of the Court for Economic Affairs, and following a number of key rulings concerning class actions (both securities-related and in general), a positive trend is discernible as regards securities- related class actions.
b. Private Enforcement
In addition to funding class and derivative actions, the ISA believes that additional steps can be taken to improve the quality of private enforcement, and remove barriers to such enforcement. The ISA is examining these additional actions as part of a joint project run by the Legislation and Legal Counsel departments. Steps that have already been completed in the reporting year and toward the end of the previous reporting year included the following: adding a page to the ISA website dedicated to private enforcement; publishing funding decisions on the aforesaid web page; publishing an SLB concerning the timing of such funding; publishing an SLB concerning the ties between the ISA and representative or derivative plaintiffs; approving more permissive funding guidelines and publishing these new guidelines; adopting a more expansive policy in approving funding decisions. For more information on this project, see Section 2.h of the Legislation Department chapter.
c. Class actions and derivative actions handled in the reporting year
Class actions and derivative actions receiving financial support from the ISA which ended in the reporting year
13 2 In the reporting year, two ISA-supported class actions were resolved:
1) The class action against Reichert Industries Ltd. et al. (Civil Action 1134/95, Civil Appeal Application 8268/96, 8377/96, 8332/96, Civil Appeal 2046/10); see the ISA’s 2011 report, pages 81-82.
2) The class action against Kital International Holdings and Development Ltd. and Levi Kushner (Civil Appeal Application 779/06, Civil Action 2338/02); see the ISA’s 2011 report, page 84.
In the reporting year, one ISA-supported derivative action was resolved:
1) The derivative action against Ayalon Holdings Ltd. et al. (Derivative Action 32690-10-11). For information on this action, see below.
Pending class and derivative actions supported by the ISA
1) Class action against Elscint Ltd. et al.
An action concerning allege discrimination of minority shareholders in Elscint Ltd. (“the Company”) by the Company’s controlling shareholders and officers appointed on their behalf in a combined process, in which they bankrupted the Company.
After various preliminary proceedings and numerous preliminary hearings, the application for approval as a class action was heard in the second half of 2007, and in January 2009 the Court decided to deny the application to approve the suit as a class action.
In 2009, an appeal was filed with the Supreme Court. On May 28, 2012, the Supreme Court accepted the appeal, approved the suit as a class action, and returned the case to the district court, to be heard as a class action (Civil Action 1318/99, Civil Appeal 2718/09).
2) Class action against Bolos Travel and Hotels Ltd. et al. (“Company”)
The suit, filed in 2002, pertains to the inclusion of misleading information in the Company's prospectus and financial statements, unfair disclosure in the Company's annual financial statements, as well as violation of duties and obligations on the part of the Company's bonds trustee towards bondholders.
In September 2009, the Court rejected the defendants’ request to postpone hearings in the case until completion of criminal proceedings initiated against them, due to concern for self-incrimination and due to the declining health of a key witness.
In her decision from October 2009, Judge Michal Nadav rejected the plaintiffs’ application to include the criminal ruling given against the Company as prima facie evidence under Section 42 of the Evidence Ordinance. This ruling was given as part of a settlement agreement in which the liquidator admitted the offences with which the Company was charged. The Judge decided that there is no sense in including the incriminating ruling given against the parties in the case, as the
13 3 Company is not an active party in the civil proceedings. Concerning the question of whether it is possible to include the indictment as evidence against the directors, who are “liable through the liability of a convicted party”, the Judge decided that the directors’ liability shall not be considered a statutory liability by virtue of their position, similar to that of principals, insurers, or employers. The Judge decided that directors bear personal liability for their wrongdoings, and in any case, directors do not bear “automatic” civil liability through their company's liability. As regards the weight given the ruling had it been admitted as evidence, the Judge stated that there was significant doubt regarding the weight of the convicting ruling obtained through a settlement agreement. This, as the liquidator did not have any “legal affinity” to the directors, and they each have different motives.
The class plaintiff’s representatives filed an application to appeal these rulings to the Supreme Court. On February 14, 2010, the Supreme Court denied the application for permission to appeal.
In March 2011, the Court partially granted the application. The application was granted against those of the defendants who signed the prospectus and against the controlling shareholder in the issuer, on the grounds of including misleading information in a prospectus concerning the planned usage of issue proceeds.
The plaintiff appealed those parts of the application for approval that were denied. The appeal has yet to be heard (Civil Action 1934/02, Civil Appeal 3103/11).
3) Class action against Dor Chemicals et al.
The suit concerns misleading investors as to the Company’s true financial position in the period 2002-2004, when the Company allegedly presented itself as a successful company with huge earnings, while withholding material information and providing misleading positive indications. The respondents have yet to submit their reply to the application for approval as a class action. In September 2011, the parties reached a settlement agreement. In October 2011, the Court submitted the settlement agreement for professional review. As of the end of the reporting year, the settlement agreement is still pending approval (Civil Action 1185/05).
4) Class action against TRD Ltd. et al.
The suit concerns misleading investors as to the Company’s financial investment activities and its exposure to high-risk, speculative financial instruments, whereas when the Company made its initial public offer on the TASE, its prospectus stated that it deals in dental instrumentation. The parties submitted all their pleadings to the Court, along with expert opinions. The Court appointed an expert on its behalf.
In December 2010, a hearing took place in the case, in which the Court’s expert was questioned. In 2011, additional hearings were held in the evidence stage of the case. Completion of the evidence stage was postponed pending testimony by some of the respondents in criminal proceedings instituted against them. As
13 4 of the end of the reporting year, these criminal proceedings are still ongoing (Civil Action 1420/07).
5) Class action against Landmark Group Ltd. et al.
Landmark is an Israeli company, whose securities are traded on the Tel Aviv Stock Exchange. Additional respondents in the case are Landmark’s controlling shareholders, directors, and the underwriters in Landmark’s IPO. The class plaintiffs are Harel Funds Management Ltd. (“Harel”), and Mr. Asher Sapir.
The suit pertains to a prospectus published by the Company on May 21, 2007. This prospectus was allegedly fraught with misleading information, including as regards two of Landmark’s properties in the United States, and as regards a construction deal involving these two properties (which ultimately failed to materialize). The plaintiffs raise additional arguments concerning misleading information included in the prospectus. According to the class plaintiffs, NIS 170 million were raised from the public based on this misleading information. The class plaintiffs argue that, had the true facts been known, the Company's securities would never have been offered to the public under a prospectus and listed on the TASE. Alternatively, they would have been purchased by group members at significantly lower prices than as offered to the public subsequently listed on the TASE. The respondents filed the responses to the application for approval, and the class plaintiffs subsequently filed their reply.
As part of the proceedings in this suit, the respondents requested that the application for approval as a class action be dismissed forthwith. In the request for dismissal, the respondents argued that, as the institutional investor’s (Harel) personal claim is of a significant amount (NIS 1.8 million), a class action is not the suitable course for resolving the claim, and that damages of these amounts call for a personal claim and not a class action, which is an extraordinary tool to be used only when personal claims are not practical or effective.
In October 2010, the Court rejected this argument. The Court stated that “Both as a matter of legal principle and as a matter of legal practice, there are cases in which a suit may also be approved as a class action at the request of those who have been significantly damaged. This applies as a general principle, but particularly applies when dealing with an institutional investor's application for approving a securities-related claim as a class action.” The Court decided that both policy considerations, the provisions of law, and case precedent support its position.
In the reporting year, the evidence stage and the summation stage of this case were completed. On December 27, 2012, the Court approved the application for approval as a class action concerning the main cause of action (Class Action 14144-05-09).
6) Class action against Standard & Poor’s Maalot Ltd. et al.
This claim was filed against Standard & Poor’s Maalot Ltd. ("Maalot"), World Currencies Ltd. and several of its officers and controlling shareholders, and against the Trust Company of Bank Leumi Le-Israel Ltd. ("Trustee"). The suit concerns asset-backed bonds offered to the public by World Currencies under a
13 5 prospectus dated February 2006 (“Prospectus”). These bonds were backed by notes issued by two overseas banks to World Currencies. A significant portion of these bonds were backed by Lehman Brothers Bankhaus AG - a German bank which is a subsidiary of Lehman Holdings ("Lehman Germany"). The prospectus included Maalot's local AAA rating for the bonds. This rating remained unchanged right up to Lehman Holding’s collapse in September 2008. Upon Lehman Holdings' collapse, the bonds' value dropped 44% and the bonds’ rating was demoted from AAA to D (Default). Upon Lehman Holdings' collapse, the Commissioner of Banks in Germany issued an order prohibiting Lehman Germany from making or receiving payments.
The suit includes various arguments brought against the respondents. The statement of claim states, inter alia, that the issuing company greatly delayed its disclosure of the identity of the backing banks; that Maalot committed to regularly monitoring its rating and to update this rating as necessary, and so Maalot's rating of the bonds in the prospectus (AAA) constitutes misleading information; and that the Trustee failed to take any action to guarantee the Company’s obligations towards its bondholders. The respondents have filed their responses to the application for approval as a class action, and the class plaintiff has filed its reply.
In January 2011, the plaintiff filed an application to introduce expert opinions on economic and legal matters. In May 2011, the Court allowed the plaintiff to submit the economic expert opinion (which had already been included in the application filed in January 2011), and to allow the respondents to submit a counter opinion within 90 days. The counter opinion was submitted in January 2012. In the reporting year, several evidence hearings were held in this case, which are expected to continue through 2013. (Class Action 1383-09).
Class action against Standard & Poor’s Maalot Ltd. et al.
The claim was filed against Standard & Poor’s Maalot Ltd. (“Maalot”), Keshet Debentures Ltd. (“Keshet”)., its directors and shareholders, and the bondholders’ trustee (“Trustee”).
The suit concerns structured bonds issued by Keshet and traded on the Tel Aviv Stock Exchange. Using its proceeds from the issue, Keshet bought debt certificates from Lehman Brothers Bankhaus AG, a German bank which is a subsidiary of Lehman Holdings ("Lehman Germany"). These debt certificates were used to back Keshet's bonds ("Notes"). Proceeds on these Notes served as the sole source of financing for Keshet's liabilities toward its bondholders.
The Lehman Brothers Group (“Lehman”) guaranteed Lehman Germany’s commitment.
The prospectus included a rating review by Maalot, which gave a temporary AAA rating to the bonds. The bonds’ rating remained high right up to the Lehman Group’s collapse in September 2008.
On September 15, 2008, Lehman announced that it was filing for bankruptcy. That same day, Lehman Germany was ordered to cease its payments to Keshet. As a result, the bond price fell instantly from NIS 0.75 to NIS 0.40. To date,
13 6 trading has not resumed in these bonds. On September 17, 2008, Maalot announced that it was downgrading the bonds to the lowest possible rating (D).
The plaintiffs sued for damages allegedly caused all bondholders. The plaintiffs argue that, from late 2007 and until September 2008, material events gradually unfolded which affected the primary risk. These events indicated the deteriorating condition of the Lehman Group, and included: mass layoffs; closing of mortgage divisions; downsizing mortgage operations; huge quarterly losses; executive layoffs; a downgrade of Lehman’s rating outlook; a downgrade of Lehman and Lehman Germany’s credit rating; a sharp drop in Lehman’s share price.
The plaintiffs argue that Keshet failed to update its bondholders on these developments, in violation of its disclosure requirements. The plaintiffs further argue that Keshet was also required to disclose the possible insolvency of its bonds, or to take action to prevent the collapse of their prices (such as replacing the backing bank or acquiring deposit insurance). The plaintiff also argued that Keshet was negligent towards its bondholders, acted in a fraudulent manner, violated its statutory duties, violated its agreement with its investors, and acted toward them in bad faith. The plaintiffs argue that Maalot, the Trustee, and Keshet also failed in rating the bonds, as the bonds’ rating remained high right up to September 17, 2008, on which the rating suddenly dropped to a D rating. The plaintiffs argue that Maalot violated its obligation under the prospectus and in other representations, to update the rating according to Keshet's ability to repay the bonds. The plaintiffs argue that the rating was not changed although there were grave indications concerning Lehman’s deteriorating condition. The plaintiffs argue that the Trustee failed to notify bondholders of Lehman’s deteriorating conditions and the implications of that deterioration. The Trustee also failed to demand that Keshet take action to secure its liabilities toward its bondholders. Therefore, the plaintiffs argue, the Trustee violated its duties under Section 35H of the Securities law and under trustee laws.
In October 201, the plaintiffs filed an application to submit an economic expert opinion. The Court accepted this application and in March 2012, the plaintiffs submitted their economic expert opinion. In the reporting year, several hearings were held in this case, which are expected to continue through 2013 (Civil Action 1611/09, Civil Action 1697/09).
7) Derivative action against Ayalon Holdings Ltd. et al.
The suit concerns an application to approve a derivative action filed in October 2010 against Ayalon Holdings Ltd. (“Ayalon”), its controlling shareholders - Levi Itzhak Rahmani and Noga Rahmani (“Controlling Shareholders”), and four additional defendants who served as directors in the company at the time. The plaintiff asked that the Court order the defendants, jointly and severally, to compensate Ayalon to the amount of NIS 103 million, for damages caused to Ayalon by the other defendants' actions and omissions.
The cause of action alleges that the terms of the Controlling shareholders’ tenure and employment in 2002-2005 were not duly approved, and so payments made to these persons for their employment with Ayalon in these years were paid illegally.
13 7 The defendants responded to the application for approval, and in May 2012, the parties submitted to the Court an application to approve a settlement agreement, whereby the company will receive NIS 22.5 million in compensation. In September 2012, the Court approved the settlement agreement. (Derivative Action 32690-10-11).
8) Class action against FMS Enterprises Migun Ltd. et al.
Two applications for approval as class actions filed in 2006 and 2008. As both applications concerned the same matter, the two actions were consolidated. The applications were filed against FMS Enterprises Migun Ltd. ("FMS"), the controlling shareholder in FMS, FMS' CEO, and members of FMS' board of directors. FMS manufactures ballistic protection products.
The cause of action alleges that publication of material negative information affecting the Company’s financial position was delayed. Following publication, the share price went down 32%. After receiving the applications, the Court decided to split the hearings in the case, so as to first clarify the issue of “the defendants’ alleged misconduct”.
In December 2011, the Court decided this question, and ruled that the applicants have met the required burden in their applications, and have proved that the respondents allegedly violated their disclosure requirements. The Court accordingly determined that the proceedings would continue to the next stage, in which it would clarify “the nature and scope of damages, the causal relationship and other matters required for approving a class action”.
In November 2012, the parties reached a settlement agreement, whereby the application for approval will be granted, and FMS will pay a total of NIS 9.8 million to the group members as defined in the application for approval as a class action. The Court submitted the settlement agreement to review by the ISA and the Attorney General. As of the end of the reporting year, the ISA and the Attorney General have yet to state their position concerning the settlement agreement, and the settlement agreement has yet to be approved. (Civil Action 2103/06, Class Action 1033/08).
9) Class action against Michael Hirschberg et al.
The case concerns an application for approval as a class action filed in November 2011 against the controlling shareholder in Malrag Engineering and Construction Ltd. ("Malrag"), directors and officers in Malrag, and Malrag's auditing accountant. The application was filed by one of Malrag's bondholders.
According to the representative plaintiff, in its three financial statements for 2009, Malrag included misleading information concerning its cash and cash equivalents item, which damaged bondholders and bond-buyers at that time. In December 2012, Malrag published reports amending the misleading information included in its financial statements. Following publication of the amending reports, Malrag's bond prices dropped by 30%-45%.
13 8 Following the events which led to the publication of the reports amending the misleading information, the ISA imposed a NIS 488,000 fine on Malrag, after the ISA determined that Malrag failed to disclose material information in its financial statements.
In April 2012, the representative plaintiff amended the application for approval as a class action. In June 2012, the respondents submitted their responses to the application for approval. (Class Action 49602-11-11).
10) Derivative action against Melisron Ltd. et al.
The case involves an application for approval as a derivative action, filed against Ofer Investments Ltd. and Mrs. Liora Ofer (“Controlling Shareholders”).
According to the plaintiff in the derivative action, two amendments to the management services agreement between Melisron Ltd. ("Company") and the Controlling Shareholders, made in 2000 and 2004, constitute transactions requiring, inter alia, approval in general meeting. This approval was not obtained, and so, according to the Companies Law, these amendments are rendered void. The plaintiff further alleges that, under these two amendments, the Controlling Shareholders were paid management fees of NIS 18 million, in violation of the provisions law. The plaintiff in the derivative action sued for the return of amounts wrongfully paid as aforesaid to the Company, or that the Company be compensated to an equal amount. As of the end of the reporting year, responses to the application for approval as a derivative action have yet to be submitted. (Derivative Action 2046-08-12).
11) Class action against David Cohen et al.
The case concerns an application for approval as a class action filed against Mr. David Cohen, Rona Arlitzki (Cohen) (jointly - "Cohen"), Hannah Tadmor, Gideon Tadmor (jointly - "Tadmor"), the Delek Group Ltd. ("Delek"), and Cohen Development and Industrial Buildings Ltd. (“Cohen Development”).
The application for approval was filed by Hatzlacha, the Consumer Movement for a Fair Economic Society ("Plaintiff"), a non-profit seeking to promote civil enforcement in Israel and encouraging effective regulation in economic and social matters.
According to the Plaintiff, the acquisition of shares in Cohen and Tadmor by Delek in November 2011 should have been effected as a special purchase offer. Since the acquisition was not effected in this manner, Cohen and Tadmor seized the control premium which also belonged to the public shareholders, and the respondents denied the public shareholders their right to object to Delek acquiring control or to participate in the sale. The Plaintiff argues that the requirement to conduct a special purchase offer is due to the fact that, for years, Cohen and Tadmor held shares in Cohen Development separately, and this is what the public was told. Therefore, until Delek acquired Cohen and Tadmor's shares, no single person held more than 45% of Cohen Development's shares. Thus, under Section 328 to the Companies Law, Delek was required to conduct a special purchase offer when first crossing this threshold.
13 9 Alternatively, even if the argument concerning the requirement to effect a special purchase offer be rejected and the Court decide that Cohen and Tadmor held the Company’s shares jointly, the Plaintiff argues that there was still a serious violation of disclosure requirements, as until the shares were sold to Delek, the public was not informed that Cohen and Tadmor hold the shares in Cohen Development jointly.
The Plaintiff is suing that the shares be rendered dormant so long as they are held by Delek (this relief is requested based on the primary cause of action). The Plaintiffs are also suing for compensation for the control premium which was wrongfully denied them. As of the end of the reporting year, responses to the application for approval as a class action have yet to be filed. (Class Action 2484- 09-12).
5. Tenders and Contracts
As a statutory corporation, the ISA is subject to the Tenders Law, 1992, and its corresponding regulations. In 2012, according to its aforesaid duties, the ISA issued 11 tenders (2011 - 19 tenders) on various matters including: information systems; office furniture; legal advice on tendering laws; placement and personnel services; collection services; etc. Following these tenders, the ISA contracted the winning bidders.
The Legal Counsel Department supports the ISA in all its tendering and contracting processes, and a Department representative serves as legal counsel for the ISA Tenders Committee.
6. Public Inquiries
In the reporting year, the ISA handled approximately 1,000 public inquiries, as compared to 1,370 in 2011.
Inquiries are submitted by various parties, including: individuals trading on the capital market, both as investors and as portfolio managers or investment advisors; lawyers representing individuals and/or reporting corporations active on the capital market; individuals who were damaged or wish to report improper or problematic events in the capital market in general, or in any of its branches; third parties, such as government entities and others referring parties to the ISA; various media representatives, such as journalists, students, research institutes and lobbies requesting information, studies and data on the capital market.
Public inquiries concern a broad range of topics. The main issues in public inquiries were as follows: broad-reaching issues pertaining to the ISA’s operations and/or reporting corporations; issues pertaining to investment advisor and portfolio manager conduct; requests for investigating suspected wrongdoing in TASE trading; broad-reaching issues concerning mutual fund and ETN operations; requests for information concerning the ISA or supervised entity activities on the capital market. Inquiries also include requests for information on the capital market, received from official bodies and/or private individuals. These requests are handled in accordance with the Freedom of Information Law, 1998.
14 0 2012 was characterized by numerous inquiries concerning debt settlements made by reporting corporations, and the effects of these settlements on capital market investors. The ISA also received numerous capital market-related inquiries following the social justice protests.
7. Report by the Freedom of Information Officer
In the reporting year, the ISA received eight requests for information under the Freedom of Information Law, 1998 (compared to four requests in 2011). One request was partially granted. One request was withdrawn by the applicant. In one request, the ISA did not have the requested information. Two requests were denied, inter alia, as the pertained to information "gathered or created as part of an investigation and concerning intelligence information", and so the Freedom of Information Law does not apply to such information (according to Section 14(a)(8) to the Freedom of Information Law). Another request was denied as it pertained, inter alia, both to information "gathered or created as part of an investigation and concerning intelligence information", and so is not subject to the Freedom of Information Law (according to Section 14(a)(8) to the Freedom of Information Law), and to "information concerning internal discussions, records of internal consultations between employees of public authorities, their members or consultants, or things which were said as part of an internal inquiry process, and opinions, drafts, advice or recommendations, given in a decision-making process, excluding such consultations as specified by law” (Section 19(b)(4) to the Freedom of Information Law). As of the end of the reporting year, the ISA is still handling two additional requests.
It is noted, that most public inquiries indirectly involve a request for information, albeit non-specific information but a request for guidance, clarification, assistance, or complaints. Response to these inquiries naturally requires the disclosure of information, although such disclosure is not included in the Freedom of Information Officer’s report.
8. Contact Details
In addition to its head offices in Jerusalem, the ISA can also be reached via its Ombudsman and the Freedom of Information Officer, at the ISA’s Jerusalem Offices:
22 Kanfei Nesharim Street, Jerusalem, 95464. Tel: 02-6556555; Fax: 02-6513646 Email: [email protected]
14 1 X Legislation Department
1. General
As detailed in this report, the ISA is responsible for supervising and regulating various activities in the capital market, encompassing numerous market players such as public companies, investment advisors, portfolio managers, mutual funds, underwriters and the stock exchange. The ISA further plans to regulate and supervise over additional activities, such as rating agency operations, trading floors, proxy advisors, broker– dealers, and custodians.
The increasing scope of regulation and ongoing work required in order to promote regulation led the ISA Chairman to announce in September 2011 the establishment of a legislative department in the ISA. The purpose of the department is to provide a solution to the ISA's many diverse legislative need, while complying with generally accepted global standards and with the principles of balanced and proportionate regulation, while emphasizing deterrence and increased discipline in the capital market and weighing cost considerations, in terms of time, resources and personnel, against public benefit. The ISA believes that balanced and proportionate regulation should be established, inter alia, through dialogue with the general public and with supervised entities.
By virtue of its function, the Legislation Department is charged with leading and promoting regulation pertaining to the ISA’s operations in general or to its various departments (such as regulation within ISA’s authority – including its investigatory, supervisory, enforcement and administrative regulation powers; legislation governing civil enforcement in the capital market; legislation required to develop IT systems (such as MAGNA); legislative amendments pertaining to fees paid to the ISA; etc.). To this end, the department's staff continuously reviews legislative developments from around the world and, and when necessary, acts to adopt relevant ISA–approved regulation into Israeli law, so as to meet generally accepted standards.
Furthermore, the Legislation Department is charged with drafting all legislation (laws and regulations) promoted by the ISA. To this end, the Legislation Department regularly collaborates with the various ISA departments, each in its relevant field of responsibility. This with the aim of advancing the capital market and guaranteeing its proper function, so as to open the market to additional players or new instruments, and to remove any barriers insofar as any were created through combination of various provisions of law. The Legislation Department employs various professionals, each charged with overseeing a different aspect of the ISA’s regulatory activities. The Legislation Department’s employees assist the other ISA departments in formulating the desired regulatory framework, and then draft and promote the preferred regulatory model.
The Legislation Department is also responsible for promoting legislative amendments, until their binding enactment. As part of these activities, the Legislation Department regularly cooperates with government ministries, the Knesset (the Israeli parliament), and other bodies involved in the legislative process. Moreover, the Legislation Department maintains open dialogue with various supervised entities and with the investing public, throughout the different stages of the legislative process.
The Legislation Department’s activities and the experience accumulated by its staff in various diverse and legislative processes, allow the Legislation Department to serve as
14 2 the body charged with regulatory knowledge retention in the ISA. Concurrently, the Legislation Department assists the ISA in interpreting new regulations, and conducts intra–organizational training on key developments and aspects in approved regulation.
In addition to the foregoing, private or government bills are proposed from time to time, directly connected to the ISA or its responsibilities. The Legislation Department is responsible for formulating the ISA’s response to these bills and for presenting the ISA’s position to the relevant bodies – government ministries, the Ministerial Committee for Legislation, or the Knesset.
Finally, the Legislation Department's staff is also responsible for regularly updating the public, inter alia through the ISA website, on legislative developments, and coordinates in real–time the various responses and issues which arise in each legislative process. This facilitates comprehensive discourse and orderly discussion which assists in the creation of proper regulation.
The Legislation Department’s staff is comprised of lawyers with financial background.
2. Special projects in 2012
1. Reducing distribution commission and transaction fees
Bank distributors are remunerated by mutual fund managers for distribution of funds by way of a distribution fee, paid according to the value of the units held through the distributor. The distribution commission rate charged by mutual fund managers indirectly affects the rate of the management fee charged by fund managers from the investing public. A process of reducing distribution commissions is expected to bring about a reduction in management fees paid by the mutual fund investing public, and to remove the barrier faced by fund managers who want to offer funds charging low management fees.
Accordingly, in the last year the ISA has worked to reduce the management fees paid by the mutual fund investing public, by initiating two parallel processes. The first is reducing the rate of the maximum distribution commission charged by the aforementioned distributors from fund managers. The second is requiring fund managers to correspondingly reduce the rate of the management fees they charge, at the amount of the full payments they have saved as a result of the reduction of distributor fees they pay the distributors, for a six–month period, during which it will not be possible to raise management fees. In the ISA's opinion, longer term intervention is unnecessary in light of the competition in this field.
For further details on this matter, see Sections 4.a.1 and 5.b.v below.
2. Credit rating agencies
In recent years, ratings given by credit rating agencies have become of utmost importance in the capital market. Ratings, inter alia, affect the interest which borrowers must pay and the feasibility of investment by institutional investors in certain financial assets, in light of restrictions applicable to them in that field.
Thus, rating agencies are among the most important gatekeepers in the capital market, and yet, there is no direct regulation of their activities in Israel. This state of
14 3 affairs could harm the investing public, which relies on ratings. This harm could also entail considerable damage to entities raising credit, as – lacking regulated ratings benefitting from international recognition – the investing public may abstain from investment.
In the past, credit agencies in Israel and the world enjoyed great freedom of action and no significant supervision. Inter alia, there were no binding standards as to conflict of interest and the capability of the rating factor, and there was significant uncertainty as to the quality and degree of responsibility that rating agencies owe debt certificate holders who bought rated securities.
Serious financial affairs occurring in the last two decades put the credit rating agencies in the limelight. Critics complained that rating companies failed in their credit risk evaluations, failing, inter alia, to update credit ratings in real–time, as necessary following market developments. Further criticism claimed that the system of incentives directing the activities of rating agencies caused them to produce false and unreliable credit ratings. Together with such criticism, calls for increasing supervision over rating agencies' activities have started.
In light of the foregoing, the agency is promoting special legislation, intended to regulate the activities of credit rating agencies in Israel, while subordinating their activities to the ISA's oversight, this with the aim of protecting the investing public, and ensuring the reliability and quality of the rating process and rating. In light of international regulatory activity, and in light of the international character of the rating agencies operating in Israel, it is proposed that the principles of regulation in Israel be determined, insofar as this is suitable to the characteristics of activities in Israel, while taking into consideration current and forming regulations in Europe and the United States.
It is proposed, inter alia, to set a registration duty for rating agencies. In addition, it is proposed to determine that rating agencies be imposed with duties, the purpose of which is to reduce conflict of interest in their operation, regulate how to address conflict of interest when it occurs and make ratings more transparent. In addition, it is proposed to set supervision and enforcement powers over the activities of ratings agencies, including administrative means of enforcement for violation of the provisions to be determined.
For further details on this matter, see Section 4.a.iii below.
3. Trading floors – finalizing regulation
In addition to the regulated trade on the Tel Aviv Stock Exchange, additional over– the–counter (OTC) trading floors have developed in Israel – mainly for forex derivatives (commonly known as forex floors). These trading floors usually operate over the internet, and appeal mainly to small–scale retail investors.
The Securities Law (Amendment 42) of 2010 (hereinafter – the Trading Floors Law), which is designed to regulate trading floors operations, was published in the Official Gazette on June 15, 2010. In addition to promoting the law, and up to the present day, the ISA works to draft and promote secondary legislation, which constitutes a pre–requisite for the Trading Floors Law to come into effect.
14 4 This regulation is planned to be implemented on several levels, and to include requirements related to stability, the leverage ratio allowed in activities, information that the floor must provide its clients and the ISA, manner of recruiting clients, examination of the client's suitability to trading floor operations and more.
This regulation is very important, as a significant share of the users of these trading platforms are small, unsophisticated investors, who do not necessarily understand the nature of their investments and the severe risks they entail (inter alia, due to the tremendous leverage ratios practiced on the floors).
In addition, since as of present there is no supervision over the floors' dealings with client money, there is a concern that money is not kept properly, and that clients who want to cease from trading on the floor cannot receive their money back at any time.
In addition to stability–related aspects of supervising trading floor operations – i.e., supervising the minimum equity requirements and liquid assets held by the trading floors – the regulatory framework includes a set of specific rules which each operator must adopt in its articles of association. Such rules will be subject to ISA approval and will be formulated and reviewed as part of the licensing process.
Upon finalization of secondary legislation, trading floors will be subject to regulation and supervision by the ISA. For more information on this matter, see Section 4.b.ii below.
4. Developing legal infrastructure for an online voting system
In the last year, the ISA has worked to create an online voting system, through which securities holders (shareholders as well as bond holders – can vote in various meetings, over the internet. This system is aimed at facilitating accessibility of information to voting right holders, and to make it easier for them to exercise this right, without imposing them with any costs. This process is intended to encourage securities holders to exercise their voting rights in assemblies and by this increase their involvement in decision–making.
The creation of the voting system is another step in a trend which began in 2003 with the shift to web–based reporting and disclosure. In 2003, the Securities Law was amended to require that reports be filed with the ISA via an electronic reporting system (MAGNA). Later, in 2009, another amendment to the Law was published, which anchored the judicial infrastructure for the operation of a secure email system (the YAEL system), through which the ISA can produce notices, requirements, ordinances or any other document it is authorized to produce to the bodies it supervises. For more information on the matter of the online voting system, see Sections 4.a.iv and 4.b.xii below.
5. Public Company Accounting Oversight Board (PCAOB)
Pursuant to the Securities Law, reporting corporations must disclose their financial statements to the public. Financial statements constitute a primary source of information on the business position of the company and its business results, and therefore are a primary tool for making investment decisions. For this reason, there is a profession the purpose of which is to independently audit the information
14 5 contained in these statements – public accounting. The ISA has expressed in the past its dissatisfaction with the present manner of oversight over the work of public accountants. The ISA even pointed to several flaws, including: lack of authority to enforce and penalize; lack of satisfactory cooperation on the part of the Institute of Certified Public Accountants; lack of adequate transparency; delay in publishing review findings; and above all – issues of the dependence of the auditor on the audited entity, one of the results of which is an inherent conflict of interest.
In light of the foregoing, the ISA is promoting a bill dealing with the establishment of a statutory body, intended to regularly oversee public accountants that audit reporting corporations in Israel. This body will be charged with the audit process conducted by these, while enacting audit regulations, including rules in the field of quality control and independence, as well as continuous improvement of the conducted audit process. This body will be subordinate to the ISA, and will be structured similarly to the US body in charge of this matter, the PCAOB (Public Company Accounting Oversight Board).
In addition to improving the quality of disclosure and measurement entailed in the creation of this body, its establishment is extremely important from another aspect – US law allows the PCAOB to rely on a parallel entity working outside the United States, as long as the latter complies with the fixed criteria. Therefore, the establishment of a control and enforcement model meeting PCAOB standards could save Israeli accounting firms the need to undergo auditing by a foreign organization as a prerequisite for investment by foreign investors in the corporation it audits.
Similarly, pursuant to European directives, it is possible to grant concessions, whether temporary or permanent, to different countries meeting the fixed standards, or countries that undertook to promote legislation dealing with the establishment of bodies designed to oversee the work of accountants and improve the quality of their audits. Countries benefitting from such recognition may engage in appropriate specific agreements with EU countries, and cooperate and exchange information on this matter. As part of this process, the state of affairs in Israel was also examined, and it was determined that in light of the public commitment expressed by the ISA, to promote principles improving audit processes in general, and the establishment of an overseeing body in particular, accountants auditing Israeli corporations, with securities traded on supervised markets in Europe, will be temporarily exempt from the application of the foregoing directive, this subject to the promotion of legislation in Israel.
In order to maintain and reinforce the process of opening up the local capital market as foregoing, the oversight environment must adapt itself to the one present in foreign markets, and meet generally accepted international standards. The establishment of such a body is therefore a key prerequisite for the further development of the capital market, and for maintaining its international position.
For further information on this matter, see Section 4.a.viii below.
6. Trustees for debt certificate holders
Trustees for debt certificate holders play an important role in protecting the debt certificate holding investing public. The investing public consists of both those
14 6 investing directly in the debt certificates, and of indirect investors, who invest in them through institutional bodies.
In light of the distribution of the investing public and its relatively small holdings, it lacks the ability and incentive to invest the necessary inputs and resources in adequately monitoring and overseeing its investments. Imposing the trustee with this role can save costs and lead to more effective protection of debt certificate holders' interests as opposed to the issuers.
In the last financial crisis, the importance of the trustee's role, and the need for reinforcing the protection granted by law to debt certificate holders, were dramatically sharpened. Many companies desired debt settlements with their debt certificate holders, and this positioned the trustee as a key factor in protecting the interests of such holders.
The ISA worked and is working diligently on strengthening the protections granted by law to debt certificate holders. As part of these efforts, in 2012, Amendments 50 and 51 to the Securities Law were published, dealing – inter alia – with the clarification of the role of the trustee towards debt certificate holders, while setting a framework for the trustee's actions and improving protections for debt certificate investors. As part of the amendments to the law, the Minister of Finance was authorized to regulate regulates designed to complete the system of regulation in this field. At present, the ISA is working to promote these regulations.
For further details on the amendments to the Securities Law, see Section 3.a.iii below. For further details on the promotion of the regulations, see Section 4.b.x.
7. Regulation of the Exchange–Traded Notes (ETNs) and Exchanged–Traded Funds (ETFs)
Until recent years, financial instruments, designed for joint investment by the public in the capital market, were offered under an overseen system, inter alia – pursuant to the Joint Investments Trust Law. In recent years, private corporations have started issuing to the public new ETF financial instruments, as ETN securities. The first ETN was issued in 2000 on the Tel Aviv 25 index, and as of March 2012, we are dealing with a market of 460 ETNs with a value of NIS 61.3 billion in public holdings.
ETNs are issued by a private, special–purpose company under a prospectus which received the ISA's permit pursuant to the Securities Law. The note is traded on the stock exchange, and gives its holder the right to receive from the issuer the return of the tracked asset (e.g., an index) that it tracks, according to a conversion formula. In addition, the holder of the note is given the right to convert the note on any trading day, and such conversion may be performed in kind or in cash equivalent, pursuant to the terms of the note.
At present, companies issuing ETNs are subject to disclosure duties under the Securities Law. Since ETNs are high–risk, and investment therein may lose significant value within a short period of time, and since a similar financial instrument – mutual funds – is subject to detailed oversight regulations, the bill proposes that detailed oversight duties also be imposed with respect to ETN issuers.
14 7 In light of the foregoing, the ISA's staff is working to promote regulation in the field of ETNs, similar to the regulation in effect in Israel in the mutual funds field, and regulation in place globally in the field of ETNs and similar investment products.
In addition, it is proposed to expand the variety of financial instruments available at present and to create a new financial instrument called an "exchange–traded fund" (ETF). ETFs are closed–end mutual funds, designed to produce results as similar as possible to the rate of change in the tracked asset (tracking fund). This instrument combines characteristics of mutual funds and of ETNs and is based, inter alia, on the US ETF model, adapted to the characteristics of the Israeli capital market. Since the ETF is a closed–end fund, it derives that it units are listed for trade on the stock exchange, and that buying its units will only be possible during trading hours. However, in contrast to closed–end funds and similarly to ETNs, it will be possible to redeem its units at the end of each trading day.
The proposed regulation includes an amendment to the Joint Investments Trust Law, as expanded in Section 4.a.ii below, and the promotion of secondary legislation accessory to the amendment presented in detail in Section 4.b.xvii below.
8. Changes in the field of administrative and civil enforcement
The ISA gives great importance to proper private enforcement of securities laws and corporate laws. Private enforcement is a significant aspect in the system of enforcing these laws, and is of particular importance to the proper functioning of the capital market. However, an examination of the present state of private enforcement demonstrates that despite a certain revival recognizable lately, the field is generally weak. This fact is augmented by the understanding, accumulated in the process of implementing administrative enforcement proceedings that their proportionate and correct implementation requires that amendments be made in the regulation under the ISA Enforcement Streamlining Law (Legislative Amendments) of 2011.
In light of the foregoing, the ISA is promoting amendments intended to provide it with tools for improving administrative enforcement proceedings, and also to grant it the power to be more involved in private enforcement proceedings, in applicable cases; this out of the understanding that in order to create balanced, proportionate and effective enforcement, it is necessary to make correct use of the three existing enforcement mechanisms in the securities field (that is – criminal, administrative and private), in a manner providing the investing public with adequate protection.
The administrative enforcement amendments primarily deal with expanding the option of reducing the financial sanction amounts, and with setting a lower scale of sanctions for smaller bodies; the private enforcement amendments primarily deal with the expansion of the ISA's financing authority, and with giving the ISA the right to participate in any securities laws civil proceeding, while expanding the ISA's involvement in derivative claims as well.
9. Procedure for initiation of regulation by the ISA
The ISA initiates and promotes regulation in fields under its responsibility, including laws, regulations, directives and ordinances.
14 8 The primary purpose of this procedure is to create a mechanism for increasing public involvement in the process of regulation, and formulating the interface with it. In general, this is done by way of public hearings on the ISA's regulation initiatives, collecting public notes, discussing them and presenting the key public notes received to the ISA plenum. In this way, it is ensured that the plenum approves proposed regulation only after examining key public reservations against it.
Except for the foregoing, the procedure determines that, usually, proposed regulation will be published for a 45–day period for public comment, and that finalized regulation will not come into effect before 90 days elapse from the date of its publication, all subject to exceptional cases of special urgency or special complexity which may cause the reduction or extension of these periods of time.
The procedure strives for execution of regulation while realizing its goals and attempting to reduce the regulatory burden imposed on overseen bodies. The public's participation in the process of legislation also contributes to the formation of clear regulation, ready for implementation, and reduces the risk of creating ambiguity which may harm the effectiveness of regulation. In addition, the periods of time determined in the procedure for the purpose of publication for public comment and coming into effect of finalized regulation are intended to assist the overseen bodies, by giving them greater stay to respond to proposed regulation and to adjust to the finalized regulation, as relevant.
In addition, pursuant to the procedure, proposed regulation initiatives are published to the public together with the key comments received with regard to them. This improves public transparency of the ISA's regulation work, and allows public control and criticism of ISA decisions on such matters.
The procedure was approved by the ISA plenum on July 25, 2012 (and updated on September 2, 2012).
3. Primary legislation and secondary legislation published in the reporting year
1. Primary legislation
i. The Securities Law (Amendment 48) of 2012, indirect amendment as part of the Banking Law (Legislative Amendments) of 2012 [Book of Laws 2345, page 206]
The law was published on March 19, 2012, and went into effect immediately.
Prior to the amendment, Section 37 of the Securities Law imposed on interested parties in a reporting corporation (mostly holders in rates exceeding 5% of the share capital or voting rights) and senior officers in the corporation the duty to provide the corporation with details on their holdings in it, including changes in their holdings, so that the corporation will be able to disclose in its reports details on such holdings, as required pursuant to Section 36 of the Securities Law.
14 9 As part of the amendment, the scope of Section 37 of the Securities Law was expanded so that in conjunction with regulations under Section 36 of the Securities Law and Section 36(b) of the Banking Law, those holding a ratio exceeding 1% of the means of control in a banking corporation without a control core, must also provide the banking corporation with details on these, so that the latter will be able to disclose them in its reports.
The amendment is designed to increase transparency in banking corporations without a control core, and to allow those eligible to nominate candidates for directors in such corporations, to know who, in addition to themselves, has holdings in ratios exceeding one percent of a certain type of means of control in the corporation, so that they may join forces in nominating candidates for the board of directors.
ii. The Securities Law (Amendment 49) of 2012, indirect amendment as part of the Companies Law (Amendment 51) of 2012 [Book of Laws 2368, page 493]
The law was published on July 17, 2012, and went into effect 45 days after its publication date.
As part of the indirect amendment, references to the Companies Law from the Securities Law were amendment, in light of the amendment of the Companies Law, dealing with companies' recovery.
iii. The Securities Law (Amendment 50) of 2012 [Book of Laws 2380, page 678] of 2012, and the Securities Law (Amendment 51) of 2012 [Book of Laws 2380, page 696]
The Amendment to the law was published on August 8, 2012, and went into effect three days from its publication date, except for certain provisions included in the law, which go into effect on the commencement date of regulations under its authorization sections. These provisions deal with the trustees register, trustee compensation and deposits to cover reasonable trustee expenses.
The amendment strengthens the status and position of the trustee for debt certificate holders, and explicitly anchors his duty to supervise the issuers' compliance with his comprehensive obligations towards debt certificate holders. The amendment clarifies that the trustee must act with care and diligence, without giving preference to one holder's interest over that of another, and without weighing considerations that do not derive from the actual holding of debt certificates. It further determines that the ISA will manage a statutory register of trustees, and also sets minimum requirements and capability criteria from trustees for their registration in this register. Such registration will be a prerequisite for serving as a trustee for debt certificates issued to the public.
Concurrently, the amendment strengthens the status of debt certificate holders and grants them several cogent rights resulting from holding debt certificates, for example – determining certain circumstances which would
15 0 grant holders grounds to call for immediate repayment of the debt certificate.
The amendment empowers the Minister of Finance to regulate regulations which – together with the Law – create an overall framework for the operation of trustees for debt certificate holders. The amendment improves certainty in this field specifically and in the capital market in general. For a general expansion on the matter of the regulations, see Section 4.b.x below.
iv. Securities Law (Amendment 52) of 2012, indirect amendment as part of the Companies Law (Amendment 20) of 2012 [Book of Laws 2385, page 6]
The Law was published on November 12, 2012, and went into effect 30 days after its publication date.
Section 39A of the Securities Law determines that provisions under the Companies Law and regulations under the Securities Law, detailed in the Fourth Addendum to the Law, will apply to companies incorporated outside Israel, offering their shares or debt certificates to the investing public in Israel. It should be noted that the ISA is allowed to dismiss such companies if it is satisfied that the law outside Israel provides adequate protection to the investing public in Israel.
As part of the indirect amendment to the Securities Law, the Fourth Addendum to the Securities Law was amended so that in addition to the provision it includes were added provisions set in the Companies Law (Amendment 20) of 2012, dealing with terms of appointment and employment in public companies and in bond companies. The added provisions deal with the duty to appoint a compensation committee and the role of the committee, and also deal with officer compensation policy and terms of appointment and employment of officers.
Table 28: Numerical data on primary legislation in the last four years
Year of Joint Investment Investment Advice Securities Law publication Law Law
2012 5 0 0
2011 4 4 3
2010 5 3 3
2009 1 1 1
15 1 2. Secondary legislation
i. The Securities Regulations (Exception with regards to Bank Shares in the Arrangement) (Temporary Provision) (Amendment) of 2012 [Book of Laws 7084, page 705]
The regulations were published on January 31, 2012, and went into effect on October 31, 2011.
The 1983 bank shares arrangement led to the enactment of the Arrangement Bank Shares Law (Temporary Provision) of 1993. This law provided for the transfer of shares of the major banks (Bank Hapoalim Ltd., Bank Leumi LeIsrael Ltd., Israel Discount Bank Ltd., and United Mizrahi Bank Ltd.) to government ownership. The ownership right granted to the government is limited in nature, and therefore the Securities Regulations (Exception with regards to Bank Shares in the Arrangement) (Temporary Provision) of 1993 were enacted shortly after the law's publication. The regulations exempt the arrangement banks and companies in which the arrangement banks constitute interested parties, from prospectus disclosure requirements and ongoing reporting on the relationship between bank subsidiaries or associates and the State or a government corporation.
Since enactment of the law and regulations, their effect has been periodically extended in light of the fact that the process of selling the banks held by the state is yet to be completed. In 2002, the regulations were amended to include only Bank Leumi and Discount Bank, as these were the only two banks which the still held by the state. Currently, following the sale of the state’s holdings in Discount Bank, Leumi is the only bank in which the state retains holdings of more than 5%. The Amendment extends the effect of the regulations by two more years, while removing mention of Discount Bank, so that the regulations pertain only to Bank Leumi.
ii. The Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) (Amendment) of 2012 [Collection of Regulations 7084, page 705]
The regulations were published on February 5, 2012 and went into effect 30 days after their publication date.
Section 60A1 of the Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) of 1969 imposes on the publication of a prospectus, mutatis mutandis, regulations 9D and 38E of the Securities Regulations (Periodic and Immediate Reports) of 1970, dealing with a corporation's duty to attach to its periodic report and quarterly report, respectively, a report on the corporation's total liabilities by payment date (hereinafter – Total Liabilities Report) by way of reference.
The amendment determines that in the case of a corporation offering its securities for the first time, the Total Liabilities Report will be included in the prospectus in a detailed manner or in any other way ordered by the
15 2 ISA Chairman or an employee appointed by him for this purpose, rather than by way of reference; this since a corporation offering securities for the first time is yet to publish a periodic or quarterly report which it can include in the first prospectus by way of reference.
iii. Joint Investments Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts) (Amendment) of 2012 [Collection of Regulations 7087, page 735]; Joint Investments Trust Regulations (Purchase and Sale Prices of Fund Assets and Value of Fund Assets) (Amendment) of 2012 (Collection of Regulations 7087, page 739]; Joint Investments Trust Regulations (Details, Structure and Form of Trust Fund Prospectus) (Amendment) of 2012 [Collection of Regulations 7087, page 735]; Joint Investments Trust Regulations (Financial Statements of Funds) (Amendment) of 2012 [Collection of Regulations 7087, page 738]; Joint Investments Trust Regulations (Options, Futures Contracts and Shorts) (Amendment) of 2012 [Collection of Regulations 7087, page 737]
The regulations were published on February 5, 2012, and most of them came into effect 60 days after their publication date.
Several years ago, the Joint Investments Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts) (Amendment) of 1994 (hereinafter – the Asset Regulations) were extensively amended. This amendment regulated a new instrument – fund of funds. A fund of funds is an open mutual fund, which may invest all of its assets in other funds, in bank deposits or in cash only. There are two types of fund of funds – Israeli fund and foreign fund. In Israeli funds of funds, investment has been limited to funds managed by the fund of funds manager; in foreign funds of funds, the fund manager is allowed to hold only funds established outside of Israel.
Under the amendment, managers of Israeli funds of funds may invest in any open–end fund which is not a fund of funds, including mutual funds which are not under their management. The new legal framework will allow all fund managers – and particularly fund managers who manage a small number of funds and whose diversification options through their managed funds are therefore limited – to diversify the composition of assets in the funds of funds they manage. In addition, the Assets Regulations were also amended in another aspect, concerning regulation of mutual fund manager's ability to buy structured debt certificates in the institutional market. As in recent years, structured debt certificates are not issued in the ordinary course of trading on the stock exchange, the purpose of the amendment is to create conditions enabling sufficient marketability of these assets on the institutional market. In addition, to the Fund Financial Statements Regulations were amended. This amendment postpones the requirement for mutual fund managers to prepare financial statements in accordance with the IFRS, and states that this duty will not be applied in the 2012 fiscal year, but will start only in 2016. Lastly, technical amendments have been made to the Options Regulations, clarifying the definition of stock exchange indices.
15 3 iv. Securities Regulations (Periodic and Immediate Reports) (Amendment) of 2012 [Collection of Regulations 7089, page 765]
These regulations were published on February 9, 2012, and went into effect immediately.
These regulations formalize, as a permanent arrangement, the provisions of the debt arrangement disclosure directive published by the ISA in 2009, which expired at the end of 2011, while applying changes which were found to be necessary in the process of implementing the directive.
The Regulations specify disclosures which must be included in immediate reports before debt certificate holders can approve a debt settlement agreement. This information is particularly important – first, as holders rely on this information when making informed decisions on whether to accept a proposed debt settlement; second, this disclosure provides holders extensive information which allows them to act through alternative channels, such as exercising collateral, calling for immediate repayment, liquidation, or initiating legal action against the company, its controlling shareholders and officers, as relevant.
Under the regulations, disclosure is required both when a debt settlement is made under court supervision pursuant to Section 350 of the Companies Law, and when settlements are made out–of–court, for example – by changing a deed of trust according to Section 35G of the Securities Law or through an exchange purchase offer due to financial difficulties).
The level of detail required depends on the nature of the debt settlement. The regulations specify three levels of detail, matching disclosure requirements to the extent to which a settlement is material to the entity (the more material a settlement, the greater the required disclosure).
The proposed regulations specify what constitutes a debt settlement due to financial difficulties. Such settlements require extensive and comprehensive disclosure, dealing with, inter alia: the reasons for the corporation reaching such a state; alternatives that were considered; the terms of the proposed settlement; financing sources; and explanations on why the proposed settlement is desirable.
In addition, the regulations require, inter alia, disclosure on payments to officers under the settlement; disclosure on the transfer of material company assets in the preceding six months; details on restrictions on distributions and transactions requiring special approval; disclosure duty on individuals providing material guarantees, and disclosure provisions dealing with valuations, if any were given.
In addition, the corporation will be required to attach a signed expert opinion by an attorney, if any significant change occurs in security terms.
v. The Securities Regulations (Signature Approver) (Amendment) of 2012 [Collection of Regulations 7120, page 1154]
15 4 The regulations were published on May 16, 2012, and went into effect 90 days from their publication date.
Chapter G1 of the Securities Law determines that various documents which it is mandatory to make accessible to the ISA, will be filed with the authority electronically. Pursuant to Section 44D(b) of the law, the Minister of Finance and the Minister of Justice may determine in the regulations the duties of the signature approver, who is the factor charged with issuing means of information security to the reporting entities. On force of the foregoing authorization, the Securities Regulations (Signature Approval) of 2003 were regulated (hereinafter – the Signature Approver Regulations).
Regulation 8 of the Signature Approver Regulations regulates the manner in which a signature approver will issue individual keys and electronic certificates to an electronic authorized signatory of a reporting entity. As part of this, it was determined, inter alia, that the electronic certificate will be valid for two years from its issue date.
As part of the amendment to the regulations, in order to assist the reporting entities, the validity of the electronic certificate was extended to four years from its issue date, this after the ISA's examination showed that extending validity as foregoing is not expected to harm the security of information reported to the ISA.
In addition, since in 2005 use of electronic reporting was expanded to additional factors, in addition to reporting corporations, debt certificate trustees and underwriters – also to fund managers, fund trustees, fund liquidators and corporations licensed under the Regulation of Investment Advice Law. It was clarified that these factors constitute a "reporting entity" for the purposes of the Signature Approver Regulations also.
vi. Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Reports) of 2012 [Collection of Regulations 7129, page 1234]
These regulations were published on June 14, 2012, and went into effect six months from their publication date.
The regulations deal with the regulation of the matter of full disclosure by licensees under the Investment Advice Law, this in three aspects: the first – quarterly reporting by portfolio managers to clients on the managed portfolio; the second – quarterly and annual reporting by a licensed corporation to the ISA, with the annual report similar to some degree to a prospectus, but not public; and the third – immediate reports by licensed corporations to the public and to the ISA.
Under the legal situation present prior to the publication of the regulations, the reporting duties applicable to licensees were very limited. Thus, for example, there was no requirement by law to provide a portfolio manager's client with disclosure on the return received in the portfolio in a certain year, or on the question of whether the client gained or lost
15 5 money in a given period. In addition, the reports sent to clients were not uniform in form or content. As a result, it was difficult for clients to find information crucial to them, even if this information was included in the report. The public of potential clients was also not exposed to uniform and comparable information, and did not possess sufficient tools to decide what licensed company to engage, since each company set for itself the contents it presented to the potential client, as well as the manner of presenting the facts.
The guiding principle applied for determining the matters which must be reported is creating a balance between information crucial to the client, to the public and to the ISA, and the desire to avoid exposing the business information of licensees and the desire not to overburden them.
The regulation binds licensees not only in terms of content but also in terms of form; that is, the reporting format determined in the regulations is binding. This reform corresponds with other processes conducted in the ISA in recent years, both in terms of the scope of disclosure demanded from the supervised entities, as well as in terms of the need to fix a uniform reporting format.
In addition, the regulations impose banks with the duty to report on advisory activities performed by the licensees they employ. Reporting is performed in two frameworks: the first – the bank's monthly report, detailing all advisory activities performed in it in the elapsed month, segmented by property; the second – the bank's report, at the ISA's demand for additional details.
vii. Administrative Violations Order (Change to the First Schedule to the Law) of 2012 [Collection of Regulations 7164, page 1706]; Administrative Violations Regulations (Administrative Fine – Investment Advisors and Investment Portfolio Managers) (Repeal) of 2012 [Collection of Regulations 7164, page 1706]; Administrative Violations Regulations (Administrative Fine – Failure to Report Preparations for Y2K Bug Issues) (Repeal) of 2012 [Collection of Regulations 7164, 1706]
These regulations were published on September 13, 2012, and went into effect immediately.
These regulations repealed the Failure to Report and Fine regulations for investment advisors, and also amended the First Schedule to the Administrative Violations Law of 1985 (hereinafter – the Administrative Violations Law), so that reference to the Securities Law, the Joint Investments Trust Law and the Investment Advice Law was canceled, this for the following reasons:
Appeal of the Failure to Report Regulations – the regulations that determined the duty to report on preparations to the Y2K bug issues were enacted as temporary provisions and therefore expired more than a decade ago, and therefore the Failure to Report Regulations were obsolete. As the regulations pertained to a non–recurring event, which
15 6 transpired more than ten years ago, clearly there is no longer any need of them.
Repeal of the Investment Advisor Fines Regulations – In 2006, Amendment 10 to the Investment Advice Law went in to effect. Amendment 10 added Chapter G1, which authorized the ISA to impose civil fines for violations of the Law. Among other things, the ISA was authorized to impose civil fines for violations by license holders of reporting requirements prescribed by the Investment Advisor Fines Regulations. The experience accumulated by the ISA shows that the method of collection under Chapter G1 is more suitable to the ISA's needs, in comparison with the proceeding regulated in the Administrative Violations Law. Moreover, in light of the Administrative Enforcement Law, published on January 27, 2011, which regulates the ISA’s administrative enforcement operations, clearly there is no longer any need for parallel administrative procedures by force of the Administrative Violations Law.
Amendment of the First Schedule to the Administrative Violations Law – Section 4 of the Administrative Violations Law states that, upon repeal of regulations setting administrative violations, the Minister of Justice may repeal the references made to the applicable laws, and omit the names of the relevant regulations from the First Schedule to the Administrative Violations Law. Thus, in addition to repealing the Failure to Report Regulations and the Investment Advisor Fines Regulations, the First Schedule to the Law was amended by the order, so as to omit the names of the aforesaid laws and regulations.
viii. Securities Regulations (Stabilization of Prices) of 2012 [Collection of Regulations 7182, page 193] and Securities Order (Amendment of the Fifth Schedule to the Law) of 2012 [Collection of Regulations 7182, page 195]
These regulations were published on November 18, 2012, and went into effect 30 days from the publication date.
As part of the underwriting reform, it was decided to adopt rules enabling underwriters, under certain conditions, to stabilize the prices of securities issued in an offering. To this end, Section 54(a)(2) of the Securities Law was amended so as to determine that any person acting according to the rules set in the regulations regarding stabilization will not be regarded as fraudulently influencing fluctuations in the prices of the stabilized securities. The regulations complement this change and prescribe the rules which must be complied with for the foregoing condition to apply. In addition, the Fifth Schedule to the Securities Law was amended, so as to enable financial sanctions to be imposed on underwriters who violate some of the provisions of the regulations.
ix. Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Application for License, Examinations, Internship and Fees) (Amendment) of 2012 [Collection of Regulations 7182, page 196]; Securities Regulations (Annual Fee) (Amendment) of 2012 [Collection of Regulations 7182, page 191].
15 7 These regulations were published on November 18, 2012, and went into effect on January 1, 2013.
The amendment changes the situation prior to the amendment, where all portfolio management companies paid a fixed fee (approximately NIS 4,500), and determines that the fees will be paid relatively to the value of the assets they manage. Pursuant to the amendment, the fee amount will be 1/30,000 of the value of the managed assets, and the minimal fee is set at NIS 5,000, with the maximum payment ceiling set at NIS 600,000. As a complementary amendment, in order to reduce the gap existing at present between the fees paid by portfolio management companies and the fees paid by fund managers, the Securities Regulations (Annual Fee) of 1989 were amended so as to determine that the annual fees paid by fund managers will be decreased permanently by 10%.
x. Securities Regulations (Annual Fee) (Temporary Provision) of 2012 [Collection of Regulations 7182, page 190]; Securities Regulations (Electronic Signature and Reporting) (Temporary Provision) of 2012 [Collection of Regulations 7182, page 192]; Securities Regulations (Underwriting) (Temporary Provision) of 2012 [Collection of Regulations 7182, page 192]; Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Application for License, Examinations, Internship and Fees) (Temporary Provision) of 2012 [Collection of Regulations 7182, page 192]
These regulations were published on November 18, 2012 and went into effect immediately.
In the regulations, a sweeping temporary provision is fixed, according to which the amounts of fees paid by all bodies supervised by the ISA will be decreased for five years by the following rates: 40% in the first two years, 30% in the two following years and 20% in the fifth year. It should be noted that the decrease started in 2011 already for reporting corporation (including dual–listed companies), fund managers and the stock exchange, and in 2012 it started applying to the other bodies as well (licensees, underwriters and information distributors).
xi. Securities Regulations (Signature Approver) (Amendment) of 2012 [Collection of Regulations 7186, page 226]; Securities Regulations (Secure Email) of 2012 [Collection of Regulations 7186, page 230]
These regulations were published on December 2, 2012, and went into effect 30 days from their publication date.
These Amendments accompany Amendment 38 to the Securities Law, published on July 27, 2009. The amendment to the law, the coming into effect of which was fixed to the starting date of these regulations, allows the ISA to issue notices, demands, directives or any other document which it is authorized to issue to supervised entities, through a secure email system, subject to such terms and characteristics as set forth in the amendment to the law and the accompanying regulations. This serves to
15 8 complement the 2003 amendment requiring that reports to the ISA be submitted using the MAGNA electronic reporting system.
Under the amendment to the Securities Regulations on the matter of the signature approver, various provisions applicable to the MAGNA system have also been applied, mutatis mutandis, to the secure email system. Furthermore, system access authorizations and the entailed data transfer procedures were regulated.
The Securities Regulations on secure email regulate email account access authorizations, frequency of access and the duties of those authorized. Inter alia, it was determined that each supervised entity will appoint an individual to serve as the authorized person with access to the secure email account on its behalf. It was further determined that that applications to register authorized persons as aforesaid will be submitted to the ISA for approval. The ISA's approval will be given according to such terms and restrictions as detailed in the amended regulations.
xii. Securities Regulations (Periodic and Immediate Reports) (Amendment) of 2012 [Collection of Regulations 7198, page 383]; Securities regulations (Details of Prospectus and Draft Prospectus) (Amendment) of 2012 [Collection of Regulations 7198, page 382]
These regulations were published on December 30, 2012, and went into effect on November 18, 2012.
These regulations anchor, as a permanent arrangement, the provisions of the disclosure directive on the matter of projected cash flow, published on November 18, 2010 and expired two years after its publication date.
The regulations deal with the manner of preparation of a projected cash flow report by a corporation to which apply the warnings set in Regulation 10(b)(14) of the Securities Regulations (Periodic and Immediate Reports) of 1970. The regulations set criteria on the matter of presentation of the projected cash flow report, including the assumptions it is based on and the board of directions explanations attached thereto.
Inter alia, the regulations set a uniform disclosure format that includes, for example, details on the financial sources for repayment of material liabilities in the short run, and comparison between expected cash flow given in the past and actual performance, together with board of directors explanations in the case of material gaps between the two.
Table 29: Numerical data on secondary legislation in the last four years
Joint Investments Investment Advice Year Securities Law Trust Law Law
2012 14 5 3
2011 11 1 2
15 9 2010 8 0 0
2009 9 6 0
4. Proposed Primary and Secondary Legislation
Please note that the legislative stage of the following proposals are may be out of date, since after elections to the Knesset held at the beginning of 2013, the proposals are to be resubmitted for approval.
a. Bills
i. Joint Investments Trust Bill (Amendment 15) of 2010
The bill covers a number of topics, inter alia – regulating offers of foreign fund units in Israel; changing the fund liquidation mechanism so as to make it more efficient and balanced; an amendment to Section 77 setting provisions dealing with mandating mutual fund managers to participate in the general assembly of corporations in which they hold securities, so that instead of the present arrangement prescribed by the Joint Investments Law, the Minister of Finance will be authorized to enact more detailed regulations, while dealing with the voting and decision making process; provisions allowing to charge differential management fees from unit holders, according to the value of their holdings, the period of holding them and the identity of the distributor through which they are held.
The Bill was approved by the Knesset on its first reading on June 14, 2010, and is currently pending review by the Knesset Finance Committee prior to its second and third readings.
Together with the ISA's initiative to decrease the maximum distribution commissions charged by bank distributors from fund managers, as explained in Section 2.A. above, a section was added to the bill authorizing regulating a limit on management fees and load charges charged by fund managers (as well as limiting trustee compensation). On November 5, 2012, the Knesset plenum approved splitting the section out of the bill (and it is called from now on the Joint Investments Trust Bill (Amendment 21) of 2012). The section is expected to be approved in the second and third readings soon. For further information on the matter of distribution commissions, see Section 4.B.v below.
ii. Joint Investments Trust Bill (Amendment 21) (ETNs and ETFs) of 2012
This amendment (mentioned in the annual report for 2011 as Amendment 16 to the Joint Investments Trust Law) deals with the regulation of ETNs and ETFs. The need for the amendment arose from the accelerated development of passive investment instruments
16 0 mainly tracking the securities, commodities and currency indices (indexed products or ETNs).
Current legislation creates regulatory arbitrage between products which are extremely similar in nature and purpose. While regulation of mutual funds under the Joint Investments Trust Law is detailed and binding, providing close supervision, ETNs – which offer an alternative financial instrument to mutual funds – are only subject to disclosure duties and to certain duties of corporate governance on force of the Securities Law and the Companies Law, which are not adapted for this instrument. The amendment aims to regulate the ETN market in a manner similar to regulation which currently applies to mutual funds, mutatis mutandis, as required by the unique characteristics of this field (particularly the fact that this is a liability product).
In addition, regulation is proposed for activities in a new financial instrument, known as an "ETF". ETFs will be tracking mutual funds, whose units will be listed for trade on the Stock Exchange, and may only be purchased during the course of trading. The purpose of regulating ETFs is to establish a legal framework for a new financial instrument which will expand the current variety of financial instruments, will allow fair competition between alternative products, and will render competition more effective.
The bill was approved by the Knesset in the first reading on July 9, 2012, and is pending review of the Knesset Finance Committee prior to the second and third readings.
iii. Regulation of Credit Rating Agency Operations Bill of 2012
This bill is designed to establish a regulatory framework for credit rating agency operations in Israel. Globalization, developments in financial engineering, and the Basel II Accord have all enhanced the role of rating companies in recent years. During the "sub–prime crisis" and the subsequent credit crisis, flaws were uncovered in the activities of rating companies. These flaws were expressed mainly in problems concerning conflicts of interest, creating potential bias in ratings, and the lack of transparency in the rating process. The main role played by rating agencies in these crises resulted in unanimous agreement among regulators in the US and Europe as to the need to re–examine and increase regulation in this field.
Following these events, it was decided that in Israel, too, there is room to update the regulation of rating company activities, and to increase supervision over these companies. The amendment is designed to provide primary legislation, through a specific law, regulating the activities of rating agencies. This law will subject rating agencies to the ISA's supervision, so as to protect investors and guarantee that the rating process and the rating itself are reliable, credible and independent. In light of international regulatory activities and in light of the international nature of those rating agencies operating in Israel, it is proposed that the principles underlying regulation in Israel will
16 1 coincide with existing and expected regulation in Europe and the United States, especially in light of the fact that rating agencies operating in Israel are all part of international groups.
The bill was published in the Official Gazette on November 5, 2012.
iv. Securities Law Draft (Amendment __) (Online Voting System) of 2012
The proposed amendment is designed to establish the legal infrastructure for the creation and operation of an online voting system, in which security holders (shareholders and debt certificate holders) will be able to vote online in assemblies in which they are entitled to vote. The system will be created and operated by the ISA. This process is designed to encourage security holders to exercise their right to vote in assemblies and by this increase their involvement in decision–making.
At present, the public participation rate in decision–making in the reporting corporation, including in public companies, is low. There are many reasons for this, inter alia concerning the fact that the voting process, requiring in general receipt of certificates of ownership of the securities from stock exchange members, is cumbersome and inaccessible. The online voting system is intended to facilitate access to the information and exercisability of voting rights for those entitled to vote in assemblies, without imposing any costs on them. In other words, the purpose is to remove the technical barrier, insofar as it prevents the public from being more active and from exercising its voting rights.
The proposed model is designed to add to the options available at present to security holders to vote in assemblies (physical presence at assemblies, voting through proxy, delivery of a letter of vote to the convener of the assembly or sending it by registered post). This is another convenient user–friendly channel that is constantly available at all times. One of the prominent advantages of this channel is that it does not require receiving an approval of ownership of a security from a stock exchange member, which is at present a prerequisite for participating and voting in an assembly.
The completion of the legal infrastructure for the creation and operation of the online voting system will be made through regulations as detailed in Section 4.B.xii below.
On November 18, 2012, the government authorized the Ministerial Committee for Legislation to approve the law draft and to send it to the Knesset for its first reading.
v. Exposure Draft Securities Law (Amendment) (Interested Parties Holdings) of 2010
The amendment proposes redefining the terms "interested party", "holding", and "purchase" so as to apply these to additional
16 2 circumstances falling under the purpose of regulation concerning interested parties. Thus, for example, regarding the term "holding", the amendment proposes that creditors be considered holders of securities pledged to their benefit starting from the earlier of either the date on which they first sought to exercise the pledge, or from the date on which they first exercised the voting rights attributed to the pledged securities. As regards the term "interested parties", the amendment defines these as any person with material holdings in a corporation’s equity or voting rights (5%), or any person serving as a senior officer of a corporation (CEO or director). It is proposed that the definition also include holdings of securities convertible to shares, rights to shares or debt, when an exercise or conversion of such securities, rights or debt would result in holdings of 5% or more (assuming full dilution). As regards debt certificates holding, the amendment proposes that holdings of 15% or more of a debt certificate series will be considered material. A material series as aforesaid is a series in which a corporation's liability constitutes at least 5% of its total liabilities.
The exposure draft law was published on March 2, 2010, and its legislation has been suspended due to its re–evaluation following public comment.
vi. Exposure Draft Administrative Regulation in the Israel Securities Authority Law (Legislative Amendments) of 2010
The amendment aims to grant the ISA administrative regulation authority over all supervised entities, in a variety of fields and matters which are currently regulated under the Securities Law, the Investment Advice Law and the Joint Investments Trust Law. This arrangement is similar to the authority currently given other regulators in Israel and abroad. The amendment proposes a mechanism for regulating the administrative regulation process, clarifying that regulation in this manner will not interfere with the ISA's authority to implement criminal enforcement against violation of its provisions. As a complementary measure to this process, the collections of regulations enacted by force of the above laws will be converted into administrative directives.
Concurrently, and in order to assure the ISA plenum's involvement in the administrative regulation process, the ISA proposes to clarify the responsibilities of the ISA plenum, as opposed to those of other ISA organs. Furthermore, the exposure draft bill includes clarifications concerning those cases where the ISA is required to grant supervised entities a hearing, as opposed to those cases where it is sufficient to exercise this right in writing.
The exposure draft was distributed on May 6, 2010. In light of further legislative amendments approved since then, the ISA is examining whether it is necessary to promote the proposal in its original format, or alternatively – to replace it with another format.
16 3 vii. Exposure Draft Front–Running Prohibition Law (Legislative Amendments) of 2011
The amendment aims first and foremost to prevent front–running by those managing funds on behalf of others, and their employees. Front–running refers to conducting transactions in a security following advance knowledge of another party's expected actions in that security. Front–running, like use of insider information, undermines proper capital market operations, as front runners (hereinafter – Front Runners) have information which is not available to the other party to the transaction. This information gives Front Runners an unfair advantage.
The second aim of this amendment is to establish a comprehensive and coherent regulatory framework concerning the holding and trading of securities by entities supervised by the ISA, provisions which are at present regulated under the Investment Advice Law and the Joint Investments Trust Law. The amendment is planned to establish an arrangement which will serve both of the above laws, according to each law's unique characteristics.
In addition to, and to complement, these provisions, the Amendment imposes supervisory responsibility, whereby corporations serving as financial brokers, and employing other financial brokers, must institute procedures guaranteeing compliance with the proposed prohibitions (i.e., a prohibition of front–running and restrictions on holdings and transactions). Furthermore, these companies must also appoint a compliance officer for this matter. In order to assist such corporations in meeting their supervisory duties, the ISA proposes that it be authorized to set forth guidelines for the procedures to be determined by these. The ISA’s guidelines will constitute a non–binding, best practice model for such procedures.
An amended exposure draft, replacing the previous exposure draft circulated on this matter, was approved by the ISA plenum on October 24, 2010.
viii. Pre–Exposure Draft Securities Law (Amendment __) (Public Company Account Oversight Corporation) of 2012
Pursuant to the Securities Law, reporting corporations must disclose their financial statements to the public. Financial statements constitute a primary source of information on the business position of the company and its business results, and therefore are a primary tool for making investment decisions. For this reason, there is a profession the purpose of which is to independently audit the information contained in these statements – public accounting.
In the last decade, more importance has been given to auditors (hereinafter – Auditors) as key gatekeepers in the capital market, this in light of events such as the Enron and WorldCom affairs in the United States and other affairs in Europe, which proved that dysfunction of
16 4 Auditors jeopardizes the stability of the financial system as a whole. It should be remembered, that despite the rules of independency applicable to Auditors, public accountants are elected by the supervised entitles and are compensated by them. The proposed legislation, even if it does not change these facts, will address the conflict of interest integral to this pattern of operations.
In light of the foregoing, the Public Company Accounting Oversight Board (PCAOB) was established in the United States. It is a private– sector, non–profit body subordinate to the US Securities and Exchange Commission, intended to oversee the work of accountants and regulate this occupation, while regulating standards and improving the quality of audits performed by accountants. The PCAOB replaced the American Institute of Certified Public Accountants, which acted as a self–supervising body by way of peer review, primarily in light of the conflict of interest built into self–supervision.
Since the establishment of the PCAOB in the United States in 2002, similar bodies were established in leading markets throughout the world, as well as in less developed countries. On this significant issue, the Israeli capital market remains behind.
In light of the foregoing, the proposed amendment is intended to establish a statutory body which will be similar in essence to the PCAOB (hereinafter – the Oversight Corporation). This body will be subordinate to the ISA, independent and non–profit, and its purpose will be to regularly oversee accountants auditing reporting corporations in Israel, and to be in charge of the audit process they perform, while regulating audit standards, including rules in the field of quality control and independence, as well as continuous improvement of the conducted audit process.
In addition to improving the quality of disclosure and measurement accompanying the establishment of the Oversight Corporation, its establishment is especially important from another aspect: the local capital market, inter alia with the encouragement of the ISA, sees great importance in the activity of foreign investors, foreign brokers and cooperation with other developed markets in the world. The establishment of the Oversight Corporation is, therefore, a key prerequisite for the further development of the capital market and for maintaining its international position.
The law was approved by the ISA plenum on May 16, 2012.
ix. Regulation of Securitization Transactions Bill (Legislative Amendments)
Following the report of the Committee for Examining Aspects Concerning Issues of Bonds Backed with Assets (Securitization) (the Haimovich – Asher Committee) published in 2005, an inter–ministerial team was created, with the participation of representatives of the ISA, the Bank of Israel, the Tax Authority, the Ministry of Justice and the
16 5 Ministry of Finance. In 2010, the team drafted a comprehensive legislative amendment draft designed to provide the legal and economic certainty required to ensure the proper functioning of the Israeli credit market by way of securitization transactions; to determine on what terms it is possible to offer to the public bonds backed with assets as part of a securitization transaction; as well as to regulate tax aspects entailed in transactions of this type.
The legislative amendments include a proposal to legislate a new law, to be called the Assignment of Rights Law of 2012, and amendments to the Securities Law and the Income Tax Ordinance.
The amendment to the Securities Law was approved by the ISA plenum on January 24, 2010.
b. Proposed Secondary Legislation
i. Securities Regulations (Offer of Securities to the Public) (Amendment) of 2011
Section 17C of the Securities Law determines that public offerings must be consistent in their prices and other terms, and be universal. One of the exceptions to this rule was determined in Regulation 11(a)(3) to the Securities Regulations (Offer of Securities to the Public) of 2007.
It is proposed to amend Regulation 11(a)(3) so as to permit, as an exception the uniform offer rule, to offer non–uniform offers in the cases detailed below, which entail special justification: when dealing with exchange purchase offers (or offers for the purchase of debt certificates which are essentially similar to exchange purchase offers and meeting the requirements of the Securities Regulations (Purchase Offer) of 2000)); non–uniform offers will also be permitted when securities are offered in exchange for a target company's operations in a merger.
In addition, it is proposed to determine that the ISA be allowed to stipulate conditions for granting a permit to issue a prospectus for non–uniform offers.
The regulations been submitted to the Knesset Finance Committee for approval.
ii. Securities Regulations (Own–Account Trading Floors) of 2011; Securities Order (Amendment of the Seventh Schedule to the Law) of 2011
On June 15, 2010, the Trading Floors Law was published, which adds Chapter G3 to the Securities Law, dealing with own–account trading floors. These floors are defined as computerized systems through which an individual may trade with his clients to his own account, and
16 6 computerized systems through which clients can trade in such systems.
The Law was written in the format of a legislative framework, which includes regulatory principles for trading floor operations, as well as various matters which, by nature, must be included in primary legislation (mainly those matters pertaining to granting and revoking licenses). Accordingly, the Minister of Finance was authorized to determine the principles of regulation of trading floor operations.
The regulations deal with the following matters: leveraging; conflict of interest provisions; examination of client understanding and matching activities with client capabilities; provisions on advertising and marketing of trading floors; license application format; reporting to the ISA; information which trading floors must disclose to clients; equity; insurance and fees The regulations also provide for the manner in which client funds are to be managed, record keeping, and recording of transactions. Concurrently, it is also proposed to amend the Seventh Schedule to the Securities Law and add trading floor–related violations to the violations listed in the schedule.
In addition, as part of the order it is proposed to amend the Seventh Schedule to the Law so that it also address activities pertaining to trading floor operations, for which it will be possible to commence administrative enforcement proceedings.
The regulations and the order have been submitted to the Knesset Finance Committee for approval.
iii. Securities Regulations (Offer of Securities to the Public) (Amendment) of 2011; Securities Regulations (Supplementary Notice and Draft Prospectus) (Amendment) of 2011; Securities Regulations (Period for Submitting Invitations for Securities Offered in a Prospectus) of 2011; Securities Regulations (Underwriting) (Amendment) of 2011
The prior commitment mechanism established by Israeli law more than a decade ago has lost its primary rationale. Moreover, recent developments in the local market, as well as legislative developments, have caused the prior commitment mechanism to become a vehicle for unjust discrimination between different investors.
A recently enacted legislative amendment, designed to expand the list of persons who may purchase securities in a non–prospectus offer, indirectly led to a technical expansion of the circle of user of the prior commitment mechanism, adding various entities which were never intended to be granted preference in prices. Another related phenomenon which the regulations try to deal with is the sale of securities shortly after their purchase in an issue, that is – purchase only for the purpose of taking advantage of the concession.
16 7 The proposed regulations are designed to create a situation in which only those managing money on behalf of others will be entitled to purchase securities through prior commitment.
The proposed amendment mostly pertains to the Securities Regulations (Offer of Securities to the Public) of 2007. As a byproduct of this amendment, the ISA proposes making technical amendments to the Securities Regulations, so that the terminology will match the proposed change.
The regulations been submitted to the Knesset Finance Committee for approval.
Since laying down the regulations, the ISA has continued receiving reservations from various factors as to the quality of the tool selected to deal with the foregoing phenomena. At present, the ISA is examining whether to propose an alternative mechanism to the one proposed.
iv. Joint Investments Trust Regulations (Reports) (Amendment) of 2012
Fund manager and trustee compensation is calculated as a percentage of the net value of a fund's assets and are deducted from that fund's returns. It is therefore extremely important to disclose the percentage paid as fees, as investors may use this information in deciding whether or not to invest in a fund. In light of the foregoing, Regulation 20F of the Joint Investments Trust Regulations (Reports) of 1994 (hereinafter – the Regulations) states that fund managers and trustees, as relevant, must report on changes in their compensation. This report must detail the date on which such changes went into effect, and the compensation paid before and after the change (hereinafter – the Report). The Report must be advertised in a newspaper.
Fund managers and trustees are not limited in the number of compensation changes that they can make. In practice, changes in compensation percentages, particularly for fund managers, are quite common. Frequent changes in manager or trustee compensation undermine its use as a stable parameter for examining the profitability of investing in a fund, and in this way hinder the advisory systems and the investing public in making investment decisions.
In light of the above, it is proposed that, in addition to information on the present compensation change, the Report also disclose information on compensation changes preceding the current change by three to four years, as relevant (taking into consideration the date of the fund's first offer of units). This disclosure aims to allow investors to include the stability of fund manager and trustee compensation in their system of investment considerations.
Due to the importance of this information, the proposed amendment does not suffice with publication of Reports in the MAGNA system and in the press, but requires that Reports be delivered to unit holders'
16 8 addresses, as mandated for reports of special importance to the investing public.
The regulations have been submitted to the Knesset Finance Committee for approval.
v. Joint Investments Trust Regulations (Distribution Commission) (Amendment) of 2012; Joint Investments Trust Regulations (Fund Manager Compensation) (Temporary Provision) of 2012
As part of the amendment to the regulations concerning distribution commissions, it is proposed to decrease the maximum distribution commission rates charged by distributors (banks) from fund managers, so that the new distribution commission rates will be as follows:
Short-term solid funds – 0.2% (instead of 0.25%); money market funds – 0.1% (instead of 0.125%); other funds – 0.35% (instead of 0.8% for equity funds and 0.4% for other funds).
In order for the reduction in distribution commissions to bring about a reduction of management fees paid by the public of investors in mutual funds, as described in Section 2.A above, it is proposed to enact temporary provisions, pursuant to which fund managers will decrease the management fees at the amount of the full payments they have saved as a result of the reduction of the distribution commissions fees they pay banks, for a six–month period, during which it will not be possible to raise management fees. Afterwards, the management fees will once again be determined independently by the funds. The assumption is that in light of competition between fund managers, the reduction will be maintained. The regulations proposed on this matter will be regulated on force of the proposed authorization section as described in Section 4.A.i above.
The regulations have been submitted to the Knesset Finance Committee for approval.
vi. Securities Regulations (Underwriting) (Amendment) of 2011
Two main amendments to the regulations are proposed:
Integrity testing for entities operating in the underwriting market in Israel Currently, the Securities Regulations (Underwriting) of 2007 specify a series of competency requirements for companies seeking entry into the underwriters register. These requirements include: insurance and equity criteria, clean conviction record, independent directors, etc. The Amendment clarifies that, in considering an entity’s application for entry into the underwriters register, the ISA will be authorized to check for flaws in the applicant's integrity, which may be inferred from flaws in the applying entity itself, a controlling shareholder therein, or an officer in either of the above. This is similar to the integrity requirement anchored in other legislation, for example – for trading floors, fund managers, investment advisors, etc.
16 9 It is also proposed to authorize the ISA to remove an underwriter from the register if there are indications for a flaw in integrity as foregoing. Such power of removal will be subject to a list of indications of an integrity flaw, which the ISA will publish pursuant to its powers under the Securities Law. The ISA will apply this list in examining all integrity– related issues it faces with respect to the various entities it supervises.
Amendment concerning foreign underwriter operations in Israel – Currently, companies may serve as underwriters in public offers in Israel if they have registered as underwriters in Israel after having met the requisite terms (primary method), or if they are a foreign underwriter that meets the conditions specified in the regulations concerning foreign underwriters (including authorization to act as an underwriter in the major exchanges in the US or UK). One of the conditions for employing the primary method is the underwriter's incorporation in Israel.
As the ISA believes that any underwriter which meets the requirements for Israeli underwriters should be granted entry into the Underwriter Registry, it proposes to cancel the requirement for incorporation in Israel. However, in order to facilitate effective supervision of these underwriters, the ISA proposes that a number of additional conditions be instituted for underwriters' registration. These additional conditions include the existence of a cooperation agreement between the ISA and the corresponding authority in the foreign underwriter's primary country of operations.
It is further proposed that current restrictions, whereby banks or insurers may not serve as underwriters, will not apply to banks or insurers serving as underwriters in the major exchanges in the US or UK.
The ISA also proposes amending the list of violations set forth in the Fifth and Seventh Schedules to the Securities Law, as detailed in Section 4.B.viii below.
The regulations have been submitted to the Minister of Finance after he conducted the mandatory consultation with the Minister of Justice, and will be submitted to the Knesset Finance Committee for approval.
vii. Securities Regulations (Purchase Offer) (Amendment) of 2011; Securities Regulations (Transaction between a Company and a Controlling Shareholder Therein) (Amendment) of 2011; Securities Regulations (Periodic and Immediate Reports) (Amendment) of 2011; Securities Regulations (Private Offering of Securities in a Listed Company) (Amendment) of 2011
The proposed amendments concern a number of issues, as follows:
Authority to grant an exemption from the ban on conducting transactions during the acceptance period – The Securities Regulations (Purchase Offer) of 2000, determine that in a certain
17 0 period of time starting from the filing of a purchase offer specification (hereinafter – the Acceptance Period), bidders, corporations under their control or controlling shareholders therein may not conduct transactions involving the securities under the purchase offer. It is proposed that the ISA be authorized to grant specific exemptions from this ban, when the ISA deems it necessary under the circumstances, including in cases where the ISA believes that it has been proven that such transactions are essential to a bidder meeting his obligations.
General update requirement – It is proposed to clarify that a general update requirement applies for reports and documents issued to the public, serving as a basis for investment or voting decisions. This requirement seeks to guarantee that investors are provided with all relevant information when voting or making their decision. Inter alia, it is proposed to determine an update duty for the following: purchase offer specifications; controlling shareholder transaction reports; private offer reports; and assembly summons reports. The above general update requirement will not apply to prospectuses, as these are already governed by a similar provision under Section 25 to the Securities Law.
Purchase offers for bonds – it is proposed to determine that the Purchase Offer Regulations also apply to purchase offers for bonds not convertible to shares (straight bonds). However, and in contrast to the regulations for complete purchase offers for shares, the proposed amendments do not state that forced acceptance may be employed in complete purchase offers for bonds in order to complete a series purchase; this, out of a view that other alternatives exist for debt certificates, such as reaching a debt settlement agreement and granting issuers the right to redeem debt certificates through deeds of trust, to avoid the possibility of minority interest derailing the complete purchase offer process, without necessitating a forced sale mechanism.
Duty of including financial statements – Currently, when a company’s securities are purchased in a controlling shareholder transaction, merger or private offer (hereinafter – the Transaction), reporting entities are required to include that company’s most recent financial statements in the Transaction report. Such reports are issued a set period of time before summoning a general meeting to approve the Transaction.
The proposed amendments state that if the period of time, between publication of a Transaction report and the date of the general meeting, includes a publication date for additional financial statements, reporting entities must append the company's additional financial statements to the Transaction report, in addition to the original statements appended to the said report.
Duty of publishing updated statements – It is proposed to determine that the target company will publish an updated statement, including material changes or updates occurring since publication of the last
17 1 periodic or quarterly report, as relevant. This statement will be published to present investors and shareholders in the target company with the full relevant information on the basis of which they are to make an investment decision on whether to accept the full purchase and on the merger's approval.
In addition, it is proposed that the minimal period of time required between the publication of the full purchase offer's specifications and the last acceptance date be changed to 21 work days (instead of 14, as currently set).
The regulations have been submitted to the Minister of Finance after he conducted the mandatory consultation with the Minister of Justice, and will be submitted to the Knesset Finance Committee for approval.
The ISA also considers determining that in proceedings, as a result of which a public company becomes a private company or is liquidated, that is in merger proceedings and full purchase offer proceedings (whether buyback or by a controlling shareholder), the buyer and the board of directors of the target company will have to file a declaration on the fairness of the price offered to shareholders.
viii. Securities Order (Amendment to the Fifth Schedule to the Law) of 2011; Securities Order (Amendment to the Seventh Schedule to the Law) of 2011
In addition to the amendments detailed in Sections 4.B.vii and 4.B.viii above, the ISA proposes amending the list of violations included in the Fifth and Seventh Schedules to the Securities Law. These schedules list violations punishable by financial sanctions (Fifth Schedule), or by administrative enforcement action (Seventh Schedule). As part of this, the ISA proposes adding to the Fifth Schedule a breach of duty to provide complete purchase offerrees, at their request, copies of documents relevant to the purchase offer, and to the statement concerning fairness of prices, and to also add to the list of violations a breach of duty to notify the ISA and the underwriter itself of flaws in the integrity of an underwriter, a controlling shareholder therein, or an officer in either.
The regulations have been submitted to the Minister of Finance after he conducted the mandatory consultation with the Minister of Justice, and will be submitted to the Knesset Finance Committee with the foregoing amendments.
ix. Securities Regulations (Shelf Offering of Securities) (Amendment) of 2011; Securities Regulations (Details, Structure and Form of Registration Document) (Amendment) of 2011
This is essentially a technical amendment, which clarifies that in the above regulations – as in all other collections of regulations enacted under the Securities Law – provisions allowing information to be included by way of reference, refer to information being included in
17 2 such a manner and conditions as stipulated in Regulation 5A of the Securities Regulations (Periodic and Immediate Reports) of 1970.
The Regulations have been submitted to the Minister of Finance prior to their submission to the Knesset Finance Committee.
x. Securities Regulations (Reports by Debt Certificate Trustees) of 2012; Securities Regulations (Reports by Issuers to Debt Certificate Trustees) of 2012; Securities Regulations (Requirements for Registration of Debt Certificate Trustees) of 2012
Concurrently with promoting the Securities Law (Amendment 50) of 2012 and the Securities Law (Amendment 51) of 2012, published on August 8, 2012 (in Section 3.A.iii above under primary legislation, hereinafter – the Trustee Law), the department is working to promote accessory regulations on force of a number of sections authorizing the Minister of Finance, set in the Trustee Law.
Accordingly, the regulations detail the reporting duties applicable to trustees, towards the ISA and towards the public, and the reporting duties applicable to the issuer towards the trustee, and the competency requirements which a trustee must meet (equity, deposit or insurance). The regulations are a prerequisite to the coming into effect of some of the provisions of the Trustee Law.
The regulations were approved by the ISA plenum of March 30, 2009.
xi. Joint Investments Trust Regulations (Fund Manager Participation in Holder Meetings and Votes for Approving Special and Complete Purchase Offers and Principal Shareholder Transactions) of 2011; Joint Investments Trust Regulations (Reports) (Amendment) of 2011; Joint Investments Trust Regulations (Details, Structure and Form of a Fund Prospectus) (Amendment) of 2011
Section 77 of the Joint Investments Trust Law requires fund managers to participate in the general meeting of corporations whose securities are held by their fund. As foregoing, Amendment 15 to the Joint Investments Law proposes amending Section 77 so that, instead the arrangement currently set by law, the Minister of Finance will be authorized to determine more detailed regulations, which will pertain to the decision–making and voting processes.
This authorization follows the recommendations submitted by the Committee for Examining Necessary Measures to Increase Institutional Entity Involvement in the Capital Market in Israel (also known as the Hamdani Committee). The Committee’s recommendations addressed, inter alia, the following matters: mandatory participation by institutional entities, including mutual funds and provident funds, in shareholder and bondholder meetings of those corporations in which they hold voting rights; dealing with potential conflicts of interest which may impair judgment in voting; allowing institutional entities to be assisted by professional factors specializing in formulating voting
17 3 recommendations; increasing institutional entity involvement in director appointments, particularly outside directors in public companies; and encouraging institutional entities to be actively involved in other corporate governance matters.
The proposed regulations were formulated in the wake of these recommendations, and formalize voting and participation requirements for fund managers in holder assemblies of corporations in which they hold voting rights. The proposed regulations also require fund manager boards of directors to formulate voting policies themselves, and require that actual voting be publically disclosed. In addition, the proposed regulations also prescribe similar requirements for fund manager voting on approvals of special or complete purchase offers, and when approving principal shareholder transactions pursuant to the Companies Regulations (Allowances for Principal Shareholder Transactions) of 2000.
The amended regulations were approved by the ISA plenum on January 24, 2010.
xii. Companies Regulations (Voting in Writing and Position Statements) (Amendment) of 2012; Securities Regulations (Electronic Signature and Reporting) (Amendment) of 2012; Securities Order (Amendment to the Fifth Schedule to the Law) of 2012
Together with the promotion of the Securities Law (Amendment __) (Online Voting System) of 2012, discussed in Section 4.a.iv above (hereinafter – the Online Voting System Law), the department's staff is working to promote accessory regulations to the law, designed to complete the system of regulation of the online voting system.
The voting in writing arrangement, currently set by the Companies Law and the Companies Regulations (Voting in Writing and Position Statement) of 2005, allows shareholders to vote in assemblies on a limited number of issues on the agenda, by delivering a voting paper to the summoning body, or by sending it by registered post. In the proxy statement, the holder states his vote, and insofar as the security is not registered in his name – since in most cases securities are registered in the name of the nominee company – the holder must also attach a certificate of ownership from the stock exchange member through which it holds it.
The proposed amendment to the Companies Regulations expands the voting in writing arrangement so that shareholder and debt certificate holders will be able to vote in assemblies, on all issues, through a proxy statement, on the online voting system.
The regulations will address, inter alia, the way of using the system and its operation, and the duties of stock exchange members with respect to the system and towards their clients.
17 4 Thus, for example, with respect to stock exchange members, provisions will be set regarding opening a securities account, the information and details which the stock exchange member will have to provide the client on the effective date on which the voting right is updated, as well as provisions on the matter of the information that the stock exchange member must produce to the online voting system on the potential voters, so as to enable them to identify themselves in the voting system and vote. In addition, the ISA proposes to amend the list of violations, so as to enable imposing financial sanctions on stock exchange members acting in violation of the foregoing provisions.
As for the system itself, vote opening and closing dates, details required for identification in the system and provisions on managing electronic votes in cases of changes in an assembly's agenda will be determined.
Finally, the Online Voting Law proposes defining the factors allowed to receive secure email through the YAEL system – a system which must be established in order to operate the online voting system – as factors allowed to report through the MAGNA system, as determined by the Minister of Finance in the Securities Regulations (Electronic Signature and Reporting) of 2003 (hereinafter – the Reporting Factors). Furthermore, it is proposed to amend the foregoing regulations and add new factors to the list of Reporting Factors.
The Regulations were approved by the ISA plenum on March 28, 2012.
xiii. Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) (Amendment) of 2012; Securities Regulations (Shelf Offering of Securities) (Amendment) of 2012; Securities Regulations (Private Offering of Securities in a Listed Company) (Amendment) of 2012; Securities Regulations (Transaction between a Company and a Controlling Shareholder Therein) (Amendment) of 2012;
Pursuant to the Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) of 1969 (hereinafter – the Prospectus Details Regulations), financial statements attached to a prospectus will be signed shortly before the prospectus date.
In reference to financial statements attached to prospectus of an initial public offering, no explicit provision on the matter was set, but on force of the generally accepted rules on the matter of signing the prospectus and practice established on this matter, the financial statements are signed shortly before the prospectus date.
On the matter of financial reports of reporting corporations, attached to prospectuses prepared pursuant to Chapter J1 of the Prospectus Details Regulations, Regulation 60B provides that all financial statements which must be attached to the prospectus (and to the draft prospectus) will be signed shortly before the prospectus date.
17 5 The implication of these provisions is that a corporation's financial statements are signed several times, sometimes with significant time gaps, when not infrequently, in the period between the signing dates significant events take place in the corporation. In addition, it derives that for a reporting corporation publishing a prospectus, or a corporation in the process of its IPO, which published statements to the public – whether in the form of a public draft publication or by having its statements attached in the past to the statements of another reporting corporation – the public is provided with two financial statement versions for the same period, signed on different dates. This matter raises weighty questions on the matter of implementing the generally accepted accounting principles and disclosure in the financial statements.
Therefore, the following amendments, inter alia, are proposed:
Amendment of the requirement from reporting corporations, anchored in the Prospectus Details Regulation, to re–sign shortly before the prospectus publication date the financial statements attached thereto, and setting instead the following requirements: in general, the financial statements attached to the prospectus will be the corporation's financial statements as released to the public in the periodic report, signed as of that date, and it will be allowed to include these reports by way of reference; the corporation will attach an "event report" detailing the events taking place from the original signature date of the last financial statements attached to the prospectus, to the prospectus publishing date, and to that report, in general, no auditing accountant's opinion will be attached;
As for corporations offering securities for the first time, the amendment requiring re–signing the financial statements attached to the prospectus shortly before publication of the prospectus will be amended. Instead, the foregoing requirements will be set, except in the case of the event report, to which the auditing accountant's up– to–date opinion will be attached;
Amending the Securities Regulations (Shelf Offering of Securities) of 2005, the Securities Regulations (Private Offering of Securities in a Listed Company) of 2000, and the Securities Regulations (Transaction between a Company and a Controlling Shareholder Therein) of 2001, in such a way that the arrangement prescribed with respect to the information to be attached to the prospectus report, offer report or transaction report, respectively, will match the law applicable to financial statements and report on events after the balance sheet date, applicable to corporations in a prospectus, as detailed above.
The regulations were approved by the ISA plenum on June 17, 2012.
xiv. Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Appointment Duty and Capability Criteria of Officers in Large Portfolio Management Companies) of 2012; Joint Investments Trust Regulations
17 6 (Appointment Duty and Capability Criteria of Officers in Fund Managers and Trustees) of 2012; Joint Investments Trust Regulations (Equity and Insurance of Fund Managers and Trustees and Capability Criteria of Directors and Investment Committee Members) (Amendment) of 2012
On November 16, 2011, the Corporate Governance Law for Fund Managers and Portfolio Managers (Legislative Amendments) of 2011 (hereinafter – the Law) was published, designed to promote and improve the system of corporate governance duties, already applicable to trust managers, as well as to impose a new corporate governance regime for large investment portfolio management companies. Under the Law, the Minister of Finance is authorized to enact regulations prescribing capability criteria for officers in large investment portfolio management companies, and the parallel authority granted to the minister on the matter of fund managers was also expanded. On force of this authority, regulations are proposed aiming at substantiating the Corporate Governance Law, out of the belief that for the purpose of maintaining efficient supervision and control mechanisms, they must consist and be manned with experienced and educated professionals, qualified to deal with the challenges of the capital market.
The proposed regulations on the matter of officers in fund managers and trustees change the current situation with respect to the capability criteria required of directors and investment committee members in the fund manager and from the officer in charge of fund trust functions in a trustee. The regulations determine capability requirements for audit committee members and impose the duty to appoint additional officers – internal control system officer, internal enforcement plan officer – who must meet capability requirements, all for the purpose of improving the effectiveness of corporate governance in funds.
Similarly, the proposed regulations with respect to large investment portfolio management companies set provisions on the capability of directors and audit committee members, as well as the duty to appoint an internal enforcement plan officer and an internal control system officer, and their capability criteria. Capability is examined by criteria of education and professional experience.
Finally, in light of the regulation of officer capability in the Regulations, on the matter of the duty to appoint and the capability criteria of officers in fund managers and trustees, it is proposed to appeal Chapter B of the Joint Investments Trust Regulations (Equity and Insurance of Fund Managers and Trustees and Capability Criteria of Directors and Investment Committee Members) of 1995, dealing with capability criteria for directors and investment committee members only.
The regulations were approved by the ISA plenum on November 25, 2012.
17 7 xv. The Securities Regulations (Provisions on the Appointment, Role, Activities, Compensation and Expenses of a Commissioner) of 2012; List of Acts Testifying to a Breach of Care and Fiduciary Duties
The ISA Enforcement Streamlining Law (Legislative Amendments) of 2011 (hereinafter – the Administrative Enforcement Law or Amendment to the Law) published on January 2011, included several arrangement, the coming into effect of which was stipulated on establishing accessory regulation of specific rules. Most of the foregoing accessory regulation was completed since the publication of the law. Following this, the department is working to promote two additional arrangements, as detailed below.
Compensation to factors harmed by violations in the administrative enforcement proceeding: Section 52.54 of the Administrative Enforcement Law authorizes the Administrative Enforcement Committee to charge a violator with payment of a financial sum to be transferred to the injured parties. The authorization section determines a general framework for imposing the foregoing means of enforcement, and leaves determining the specific contents to regulation.
Accordingly, the proposed amendments address, inter alia, the following matters: capability criteria for appointment as commissioner; the commissioner's manner of performing his position (for example: how to divide payments, applying evidence law); reports which he must give in connection with performing his position; the manner of determining the commissioner's compensation and expenses (including expenses for employment of professionals); way of publishing notices to injured parties; rules on filing payment requests and on misleading the commissioner.
List of acts testifying to a breach of care and fiduciary duties: The Administrative Enforcement Law included amendments to the Joint Investments Trust Law and the Investment Advice Law. The Amendment to the Joint Investments Trust Law determined, inter alia, that the performance of an act included in the list to be published by the ISA, testifying that the person acting so did not act with the care, faith and diligence to be expected from a reasonable trust manager or trustee under similar circumstances, constitutes an administrative offence for which a board appointed by the Administrative Enforcement Committee will be allowed to impose administrative means of enforcement on the violator. A similar arrangement was set in the Investment Advice Law, according to which the performance of an act included in the list of actions or omissions determined by the ISA, which testify that the person acting so did not act with the care expected from a reasonable licensee under similar circumstances, also constitutes a violation for which it will be possible to commence such administrative enforcement proceedings.
Accordingly, the proposed lists refer to acts or omissions related to each of the foregoing laws.
17 8 The regulations and the list were approved by the ISA plenum for the purpose of their publication for public comment on October 24, 2012.
xvi. Securities Regulations (Periodic and Immediate Reports) (Amendment) of 2012; Securities Regulations (Details of Prospectus and Draft Prospectus) (Amendment) of 2012
The ISA proposes to anchor in these regulations, as a permanent arrangement, the provisions of the disclosure directive regarding disclosure on real–estate for investment activities, published on January 11, 2011, which will finally expire in April 2013. The proposed regulations are very similar to the disclosure directive, details on which presented in Section 6.B.i below.
The regulations were approved by the ISA plenum for the purpose of their publication for public comment on November 25, 2012.
xvii. Regulations Supplementing the Joint Investments Trust Bill (Amendment 21) (ETNs and ETFs) of 2012
Together with the promotion of the Joint Investments Trust Law (Amendment 21) (ETNs and ETFs) of 2012 (hereinafter – Amendment 21), discussed in Section 4.A.ii above, the ISA staff is working to promote secondary legislation supplementing the amendment, designed to complete the system of regulation of ETNs and ETFs. As part of this, some of the current regulations dealing with mutual funds have been adapted as to also apply to ETNs and ETFs. In addition, proposals for new regulations with respect to ETNs and ETFs have been prepared. In the Collections of Regulations there are regulations constituting a prerequisite for the application of Section 21. Below are the regulations' details:
(1) Joint Investments Trust Regulation (Backing Account) (Amendment) of 2012
Under Amendment 21 of the Joint Investments Trust Law, setting the legal regulation applicable to ETNs and ETFs, it is proposed, inter alia, to add the duty to create a backing account, as one of the conditions which a joint investment manager must meet.
The regulations propose that ETN managers will be required to allocate in the backing account capital for operational risk, market risk and credit risk, while ETF managers will be required to allocate capital for operational risk only.
The regulations are designed to balance between the need not to set excessively high capital requirements, which may lead to the closure of the ETN industry, and the need to reduce economic incentives to create exposure, and to encourage solid conduct in ongoing ETN management operations.
17 9 Accordingly, the proposed regulations deal with setting the sums which a joint investment manager is required to deposit in the backing account, in accordance with the model formulated and approved by the ISA plenum, as well as provisions on the type of assets deposited in the backing account, and the way of withdrawing assets from it.
The regulations were approved by the ISA plenum on September 21, 2011.
(2) Joint Investments Trust Regulations (Closed–End Fund Manager's Report on Offering Results and on Offering Cancelation) (Amendment) of 2012
The ISA proposes to apply the current regulations on reporting on the results of a public offering of a closed–end fund's units and on the cancelling of an offering, to any traded joint investment, meaning – to both closed–end funds and ETNs, mutatis mutandis, as resulting from the difference in the processes proposed in Amendment 21 regarding public offerings of ETF units and ETNs on the one hand, and offerings of closed– end fund units on the other hand.
The regulations were approved by the ISA plenum on November 23, 2011.
(3) Joint Investments Trust Regulations (Redemption Price for ETN Units and Value of ETN Assets and Liabilities for Integrity Testing of ETN Assets) of 2012
Amendment 21 of the Joint Investments Trust Law proposes that ETNs will consist of units, each of which granting equal right in the ETN asset, plus the difference in redemption in the ETN, insofar as the difference is positive, or less such difference, insofar as it is negative. If the redemption difference is negative, it will constitute, in fact, the ETN manager's debt to the holders of units in the ETN, and therefore – an ETN asset. If the redemption difference in an ETN is positive, it will constitute, in fact, the ETNs' debt towards the ETN manager, and therefore – the ETN manager's asset. Amendment 21 determines, inter alia, how that settling of accounts between the ETN manager and the ETN will be performed.
Accordingly, the regulations provide rules for the revaluation of the various assets and liabilities held in the ETN, for the purpose of measuring the ratio of the net value of ETN assets and its redemption price. Measuring the foregoing ratio is necessary in order to estimate the ETN redemption difference, i.e. the difference between the net value of an ETN’s assets and the total redemption price of all ETN units.
18 0 The regulations were approved by the ISA plenum on November 23, 2011.
(4) Joint Investments Trust Regulations (Assets that may be Bought and Held in an ETN and their Maximum Amounts, and Transactions in an ETN) of 2012
The primary concern of the proposed regulations is to determine the assets which an ETN manager may buy and hold, the conditions for buying these and their maximum amounts. The regulations are further concerned with determining the transactions which an ETN manager may perform for the ETNs he manages, all on the basis of the ETN supervision model, as approved by the ISA plenum on February 16, 2011.
According to Amendment 21, the ETN, unlike a mutual fund, will include the ETN manager's obligation to complete the difference, if any is created, between the value of the ETN assets in reality and the value of the tracked assets (the ETN's redemption formulate). The purpose of the proposed regulations is to enable the ETN manage to purchase only assets, and to perform only transactions, which meet conditions ensuring no such difference, and tradable enough to reduce the liquidity risk. In addition, insofar as the ETN manager is not covered by the tracked assets themselves, it is required to reduce exposure to credit risk, in order to reduce exposure to the collapse of any financial body.
The regulations were approved by the ISA plenum on January 25, 2012.
(5) Joint Investments Trust Regulations (Material Change in a Fund's Investment Policy) (Amendment) of 2012; Joint Investments Trust Regulations (Calculating Return) (Amendment) of 2012
At present, the Joint Investments Trust Law limits the option of materially changing a fund's investment policy to only once every 12 months, and authorizes the Minister of Finance to determine cases and circumstances in which the fund manager is allowed to materially change the investment policy even before 12 months elapse. Such cases and circumstances were set in the Joint Investments Trust Regulations (Material Change in a Fund's Investment Policy) of 2007 (hereinafter – the Material Change Regulations).
Materially changing policies in such funds often forces the fund manager's decision on such a change on a considerable part of unit owners, who chose to buy units of one fund over another out of their own consideration, and who do not necessarily agreement with the decision. This problem is aggravated when a considerable part of investors tends not to react in time to
18 1 changes in the fund's characteristics, and even continues holding the units of a fund it would have avoided joining to begin with, had it been aware of the change in terms in advance.
Therefore, and in order to provide unit holders with certainty and protection with respect to the characteristics of the portfolio managed for them, the ISA proposed, in Regulation 21 to the Law, to prohibit materially changing the investment policy of a joint investment. As a complementary step, a need arose to redefine material change in the investment policy of a joint investment, and at the same time, to redefine and reduce the cases in which it will be allowed, despite the prohibition, to materially change the policy.
For this purpose, it is proposed to amend the Material Change Regulations, and a technical amendment is proposed as an accessory step, including mainly amendments of definitions and terms in the Joint Investments Trust Regulations (Calculating Return) of 1995.
(6) Joint Investments Trust Regulations (Management of ETN Assets, Liabilities and Risks Entailed Therein) of 2012
Section 57L of Amendment 21 determines that an ETN manager will manage ETN assets, liabilities and risks entailed in its operation (hereinafter, collectively – Risk Management) in a way enabling him to comply with the provisions of law, and authorized the Minister of Finance to determine rules on this matter in the regulations.
Accordingly, the proposed regulations determine a general framework for Risk Management together with specific provisions, which together are designed to regulate the ETN manager's compliance with such duties imposed on him by law.
It is proposed to determine specific provisions under which an ETN manager will have to act, inter alia, as to examine, measure, control and manage exposure to market risk, operational risk, credit risk and liquidity risk.
The regulations were approved by the ISA plenum on February 22, 2012.
(7) Joint Investments Trust Regulations (Classification of ETNs and ETFs for Publication Purposes) of 2012
On March 28, 2012, the ISA plenum approved the Joint Investments Trust Regulations (Classification of ETNs for Publication Purposes) of 2012 (hereinafter – ETN Classification for Publication Regulations). The regulations were formulated on the basis of the Joint Investments Trust Regulations (Classification of Funds for Publication Purposes) of 2007
18 2 (hereinafter – Fund Classification for Publication Regulations), while adapting them to the unique characteristics of ETNs and the existing practice in them.
As the ETNs and ETFs are alternative investment instruments with similar general characteristics – both are traded, both track the return of a tracked asset and both are offered to the public in the same manner – it is proposed to apply to ETFs the ETN Classification for Publication Regulations, approved by the plenum, rather than the Fund Classification for Publication Regulations, this as part of integrated regulations.
The regulations regulate the format of publication of data on all or most funds or ETNs; this means publication in different media sites, which provide the public with an accessible platform for comparing different products.
The regulations were approved by the ISA plenum on June 17, 2012.
(8) Joint Investments Trust Regulations (ETF Manager Activities during Stock Exchange Trade) of 2012
Section 57A of Amendment 21 determines that a fund manager will buy and sell units of an ETF under his management during trading, for the fund, to the best interest of the unit holders in the fund, and in accordance with the provisions determined by the Minister of Finance in the regulations.
Accordingly, the proposed regulations set only a general framework, but do not fix rules according to which the fund manager must buy or sell ETF units during trading. Instead, they charge the fund manager's board of directors and the trustee with approving rules on force of which the fund manager will operate during the trading day, of course with respect to the primary parameters entailed in this activity, such as the minimal scope of trading, quote duration etc. The fund manager's board of directors and the fund trustee will continue examining the set rules every six months and change them as necessary.
The regulations were approved by the ISA plenum on June 17, 2012.
(9) Joint Investments Trust Regulations (Details, Structure and Form of Joint Investment Prospectus) of 2012
On June 17, 2012, the ISA plenum approved the Joint Investments Trust Regulations (Details, Structure and Form of ETN Prospectus) of 2012 (hereinafter – the ETN Prospectus Details Regulations). This proposal was formulated on the basis of the Joint Investments Trust Regulations (Details, Structure and Form of Fund Prospectus) of 2009 (hereinafter – the Mutual
18 3 Fund Prospectus Details Regulations), and taking into consideration the disclosure provisions determined in the supervision model approved by the ISA plenum on February 16, 2011, and the disclosure provisions applicable to companies issuing ETNs at present, whether by force of the Securities Regulations (Periodic and Immediate Reports) of 1970 or the Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) of 1969, or in accordance with the ISA's guidelines and current practice.
As part of the horizontal process of balancing and mutual change, designed to unify, inasmuch as possible, the provisions applicable to mutual funds and to ETNs, insofar as these do not derive from fundamental differences between the different instruments, the ISA plenum approved, together with the approval of the ETN Prospectus Details Regulations, integrating the said regulations with the Mutual Fund Prospectus Details Regulations, to one Collection of Regulations, so that it will apply to any joint investment (fund, including ETF, and ETN). The integrated version will include both shared provisions and individual provisions for any type of joint investment, for its unique characteristics.
As part of the integrated version, mutual funds will be subject to some of the provisions proposed in the ETN Prospectus Details Regulations. The ETF, which is an alternative product to the ETN, and which is similar to it in many characteristics, will be subject to some of the provisions applicable at present to mutual funds, and to some of the provisions proposed in the ETN Prospectus Details Regulations.
This move is intended to assist joint investment managers, who may propose in the future three different types of joint investment. Such managers will be able to learn the disclosure provisions applicable to them from one combined collection of regulations, instead of referring to three separate collections of regulations. In addition, this will render supervision more effective.
(10) Joint Investments Trust Regulations (Joint Investment Reports) of 2012
On March 28, 2012, the ISA plenum approved the proposed version of the Joint Investments Trust Regulations (ETN Reports) of 2012 (hereinafter – the ETN Report Regulations). The ETN Report Regulations address the system of immediate, weekly, monthly, quarterly and annual reports which ETN managers and ETN trustees, as relevant, must file with the ISA and the stock market, or any of those.
Further to the foregoing ISA plenum decisions, and as part of a horizontal process of balancing and mutual change, designed to
18 4 unify, inasmuch as possible, the provisions applicable to mutual funds and to ETNs, insofar as these do not derive from fundamental differences between the different instruments, it is proposed to integrate the version of the foregoing ETN Report Regulations with the Joint Investments Trust Regulations (Reports) of 1994 (hereinafter – the Fund Report Regulations), regulating the reports which a fund manager must file, in one collection of regulations, so that it will apply to any joint investment (fund, including ETF, and ETN).
This move is intended to assist joint investment managers, who may propose in the future three different types of joint investment. Such manager will be able to learn the disclosure provisions applicable to them from one combined collection of regulations, instead of referring to three separate collections of regulations. In addition, this will render supervision more effective.
The integrated version will include both horizontal provisions and specific provisions for each type of joint investment, for its unique characteristics. The ETF, which is an alternative product to the ETN, and which is similar to it in many characteristics, will be subject to some of the provisions applicable at present to mutual funds, and to some of the provisions proposed in the ETN Prospectus Details Regulations. A similar move was recently approved by the plenum, on the matter of creating a unified collection of regulations on the prospectus details of all types of joint investment.
The regulations were approved by the ISA plenum for the purpose of their publication for public comment on September 2, 2012.
(11) Joint Investments Trust Regulations (Proof of Ownership of Joint Investment Unit for General Assembly Vote) of 2012
Like the current arrangement in Section 182 of the Companies Law, Section 111 of the Joint Investments Trust Law, as expanded in Section 95E of Amendment 21, determines that a unit holder desiring to voting in the joint investment general assembly will be entitled to unconditionally receive from the distributor, through whom the unit is held, an approval of his ownership of the units, in the manner determined by the minister.
The proposed regulations, similarly to the Companies Regulations (Proof of Ownership of a Share for General Assembly Vote) of 2000, determine the mechanism according to which the distributor will approve the ownership of the unit holder of the joint investment units, for the purpose of his participation in the general assembly. The regulations also determine what details the distributor must include in the foregoing approval.
18 5 The regulations were approved by the ISA plenum for the purpose of their publication for public comment on September 27, 2012.
(12) Joint Investments Trust Regulations (Calculating ETF and ETN Return) of 2012; Joint Investments Trust Regulations (Calculating Return) (Amendment) of 2012
The proposed regulations were drafted on the basis of the Joint Investments Trust Regulations (Calculation of Returns) of 1995, mutatis mutandis, as required mostly due to the unique characteristics of ETFs and ETNs as traded instruments tracking the return of a certain tracked asset. The proposal determines the manner in which the redemption price return is to be calculated in the ETF and the ETN, and the return of the tracked asset therein, and the periods for which it is permitted to present the return, and is mainly designed for the purpose of presenting those data in publications.
Since ETNs and ETFs are alternative investment products, to fully compare these products, it is proposed to determine uniform periods for calculating returns and uniform rules for calculating the redemption price of ETNs and ETFs, or the price of the tracked asset that these track; this, although in certain cases the manner of calculating this is different from the manner of calculating the redemption price of an ETN for the purpose of examining the ratio between the ETN assets and the total redemption price in it (liabilities to holders), or from the manner of calculating the return of the tracked asset.
In addition, it is proposed to amend the Joint Investments Trust Regulation (Calculating Return) of 1995, currently applicable to open–end funds. This amendment will make technical amendments and will also amend the manner of calculating the return when a fund is split or its units are consolidated.
The regulations were approved by the ISA plenum for the purpose of their publication for public comment on September 27, 2012.
(13) Joint Investments Trust Regulations (Redemption Formula) of 2012
ETNs are joint investment instruments undertaking to track the return of the tracked asset, in accordance with the ETN's redemption formula. Therefore, the proposed regulations determine that the ETN redemption formula must fully reflect the rights deriving for holders of the ETN units, and list the components which the redemption formula must include in accordance with the type of ETN and the tracked assets therein.
18 6 For the purpose of maintaining the principle of uniformity, intended to allow an investor, considering an investment decision, to compare different ETNs in a real and informed manner – not only ETNs managed by the same ETN manager, but also ETNs of other ETN managers – the redemption formulas must be uniform, in accordance with the type of ETN and the type of tracked asset. In addition, the redemption formula components must be determined in accordance with uniform calculation dates, by ETN type and tracked asset type, this with respect to all ETN managers. Such unification of formulas will assist investors in easily comparing different ETNs of the same type, since distinguishing between them will focus on the compensation amount of the manager and the trustee. The formulas themselves, the manner of calculating part of their components and the calculation dates will be determined by the ISA in a separate provision, in accordance with the components listed in these regulations.
In addition, the proposed regulations determine a daily reporting duty, similar to the daily reporting practice applicable at present to ETN managers, which was regulated in the past in directives. The report is given with respect to each of the ETNs managed by the ETF manager, and includes the up–to–date values of each of the formula components. This report will be filed every trading day, before the start of stock exchange trading. This way, the public will have the up–to–date formula values as of the beginning of that trading day, for the purpose of evaluating the ETN's value in the course of that day also, and comparing this with its price as traded on the stock exchange.
The regulations were approved by the ISA plenum for the purpose of their publication for public comment on September 27, 2012.
(14) Joint Investments Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts) (Amendment) of 2012
The Joint Investments Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts) of 1994 determines the assets which a fund manager may buy and hold, as well as the terms for their purchase and their maximum amounts. The proposed amendment to the regulations is intended to adjust these with respect to assets which may be held in ETFs, in light of the unique characteristics of this product, as well as with respect to the proper limitations on holding such a fund in another fund.
Amendment 21 opens a window to competition between three products: open–end funds, ETFs (which is a type of closed–end fund) and ETNs. Accordingly, in order to enable fair competition, it is necessary to adjust the asset regulations so that no
18 7 unnecessary gaps are created between assets which an open– end fund manager may hold for the fund, in comparison with assets which an ETF manager may hold for the fund, and also between a fund holding ETF units in comparison with a fund holding ETN units, and the holding rates allowed in these assets.
Regulation of ETNs on this matter will be performed in a separate collection of regulations, discussed in Section 4.B.xvii.(4) above.
The regulations were approved by the ISA plenum for the purpose of their publication for public comment on October 24, 2012.
(15) Joint Investments Trust Regulations (Publication of Unit Price and Redemption Price in Open–End Funds and Unit Price and its Value in Closed–End Funds) (Amendment) of 2013
The regulations set the fund manager's duty to publish in the stock exchange price sheet, with respect to an open–end fund – the purchase rate and the redemption price, and with respect to a closed–end fund – the unit value, this shortly after he receives the information allowing him to determine such data.
It is proposed to amend these regulations so that the duty of publication will also apply to publishing the redemption price, unit price and unit value in ETFs, and the publication of redemption price in ETNs.
The regulations were approved by the ISA plenum for the purpose of their publication for public comment on November 25, 2012.
(16) Joint Investments Trust Regulations (Material Change in an ETN's Investment Policy) of 2012
As part of Amendment 21, the ISA proposed prohibiting material changes in the investment policy of a joint investment, except for under the terms determined by the Minister of Finance, as explained in Section 4.B.xvii.(5) above.
In light of the uniqueness of ETNs, which undertake to track the return of a tracked instrument in accordance with a defined redemption formula, Amendment 21 defined investment policy in an ETN as "the tracked asset and the manner of tracking it." Accordingly, it is proposed that these amendments determine that a material change in the investment policy of an ETN is any one of the following: (1) a change of the tracked asset in the ETN; (2) a change changing the exposure profile of the ETN; (3) any other change, materially changing the character of the ETN. In addition, it is proposed to determine limited conditions under which it will be possible to make such material changes.
18 8 A change of the tracked asset as a material change in the investment policy is also relevant to tracking funds and ETFs, the investment policy of which determine that their purpose is to receive results as similar as possible to the rate of change in the tracked asset. Therefore, it is proposed that these regulations be later integrated in the amendment to the Joint Investments Trust Regulations (Material Change in a Fund's Investment Policy) of 2007, discussed in Section 4.B.xvii.(5) above, so that they also apply to funds of this type.
The regulations were approved by the ISA plenum for the purpose of their publication for public comment on November 25, 2012.
(17) Joint Investments Trust Regulations (Transactions which may Entail Conflict of Interest, Material Transactions and Off– Market Transactions) (Amendment) of 2012
Amendment 21 authorizes the Minister of Finance to determine what types of transactions, transactions which may entail conflict of interest, material transactions and off–market transactions or off–regulated–market transactions – require the discussion of the board of directors of the joint investment manager.
Accordingly, the proposed regulations define what types of transactions as foregoing the ETN manager's board of directors will have to discuss, and also determine that the ISA will be allowed to permit the board of directors to approve certain types of such transactions by way of determining conditions for executing the transactions under a procedure approved by the trustee, this instead of ad hoc approval of each individual transaction. Approval of transactions by procedure will facilitate the daily conduct of the ETN manager, with the purpose of tracking the ETN's tracked asset and adjusting the assets held for the ETN in accordance with the sales and purchases of traded ETN units.
The regulations were approved by the ISA plenum for the purpose of their publication for public comment November 25, 2012.
5. Private and government bills pertaining to ISA operations
Below are details on private bills published or still in the process of legislation, in the drafting or promotion of which involved the ISA:
1. Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Bill (Amendment 19) (General Investment Advice and General Investment Marketing) of 2012
18 9 This is a private bill filed by Members of the Knesset Amnon Cohen, Faina Kirschenbaum, Zion Pinyan and Yitzhak Vaknin, in the drafting and wording of which the ISA was involved.
The definition of "investment advice" currently includes, in addition to activity which can be defined as "classic investment advice" (in which an investment advisor provides advice to a certain client on his investments), also "general investment advice", meaning – uniform and nonspecific advice given to a large, sometimes unknown, number of people, which does not create expectations, on the target audience's part, that it will be customized for its personal needs, and which includes no interpersonal communication between the advisor and the target audience.
Below are the key issues this bill deals with:
Defining general investment advice and general investment marketing activity (hereinafter – General Services), while differentiating between these and provision of investment advice and marketing services, canceling the need for a license to deal in them, and specific regulation of the General Service.
Clarifying the application of the provisions of law on the matter of investment advice and investment marketing activities also to activity which in nature falls within the definition of such services, although it does not refer to securities and financial assets as defined by law.
The Bill was approved by the Knesset on its first reading on July 24, 2012, and is currently pending review by the Knesset Finance Committee prior to its second and third readings.
This bill does not exhaust all private bills filed or published in 2012, which pertain to the ISA's fields of responsibility.
6. Directives
1. New Directives
During the year, the ISA published, by force of its authority under Section 36A of the Securities Law, the following directives:
i. Disclosure on re–presentation of financial reports
The directive was published on March 11, 2012, and went into effect 14 days after its publication date.
The presence of material errors in reports may harm the ability of their users to analyze and evaluate the performances of the corporation. Therefore, it is very important to provide disclosure on material errors in reports and details on their correction.
Therefore, the ISA believes that the presence of a material error in financial reports published in the past, necessitating their correction,
19 0 constitutes an "event or matter" which must be reported in an immediate report, pursuant to Regulation 36(A) of the Securities Regulations (Periodic and Immediate Reports) of 1970, and that disclosure of the error in the financial statements is unsatisfactory.
In light of the foregoing, and in order to achieve uniformity in the disclosure required on material errors in reports, this directive sets disclosure details on this matter.
ii. Disclosure in connection with distribution in companies that adopted IFRS 9 early
The directive was published on April 24, 2012, and went into effect immediately.
The directive deals with the requirement from companies that adopted IFRS 9 early, and chose to allocate capital financial instruments under "other comprehensive income" (so that the revaluation results of those instruments will never be carried to profit and loss), to disclose in the periodic report the balance of distributable profits, negating IFRS 9. In addition, on every date on which a dividend distribution is announced, in which the company meets the profit test only following the adoption of IFRS 9, such companies are required to disclose the board of directors' reasons for the existence of distributable profits, in light of the purpose of the distribution tests set by the Companies Law, and to disclose the material information and estimates on which the board of directors decision to approve the distribution is based. This will include professional opinions, valuations and expected cash flow reports, on which the board of directors relied in approving the distribution.
The directive was canceled by the ISA plenum on October 24, 2012, in light of its redundancy upon publication of the Companies Regulations (Other Amounts Included in Equity Considered Surpluses) of 2012, initiated by the ISA staff together with the Ministry of Justice, which regulated the definition of surpluses so that the adoption of IFRS 9 and designation of investments as "fair value through other comprehensive income" no longer has any effect in comparison with the situation prior to their adoption.
iii. Corporate Governance Questionnaire
This directive was published on September 12, 2012, and went into effect in the financial statements for 2012.
The directive is part of the horizontal project of improving statements, as part of which the ISA is examining various aspects entailed in reporting on a corporation's businesses in prospectuses and in periodic and quarterly reports, with the aim of simplifying the current disclosure and improving its relevancy to the investing public.
The corporate governance questionnaire, by way of a disclosure directive, is a first, primary component of the legislation outline draft on the matter
19 1 of the corporate governance report, published by the ISA staff in February 2011, following flaws discovered with respect to corporate governance disclosure requirements. The main part of the legislation outline is creating a designated, concise and uniform corporate governance report based, inter alia, on the Goshen Committee Report (a commission examining corporate governance codes in Israel).
The corporate governance questionnaire includes questions, by topic, pertaining to corporate governance. In the first stage, the questionnaire focuses on implementation of mandatory provisions of the Companies Law, as well as recommended corporate governance provisions under the First Schedule to the Companies Law.
The ISA believes that a standard questionnaire on corporate governance aspects will serve as an efficient, focused and concise platform, providing the investor with a means, both independent and comparable, for examining the quality of corporate governance in corporations, and the pricing of their securities. In addition, it will be possible to use the foregoing questionnaire for the purpose of giving a relative corporate governance quality score. However, the questionnaire does not state a "numerical value" for each question, and does not require disclosure on the score received by the reporting corporation, but rather is intended to enable investors to give such relative scores to the best of their understanding.
iv. Disclosure on the valuation of ETNs and comparison of returns with the return of the tracked index
This directive was published on September 12, 2012, and went into effect in the financial statements for 2012.
Since an ETN is an instrument undertaking to track a certain base asset, and to achieve a return similar to the investment in that base asset, supposedly one could expect ETNs issued by different issuers, tracking the same base asset, to yield similar returns. In reality, different ETNs have different conversion formulas, with different components and different issuers. Moreover, different issuers use different ways of covering in order to fulfill their obligations, and this may create varying returns. Another reason for the different in returns of ETNs is the lack of uniformity in the conversion formulas, with respect to the dates on which the base index / asset rate is determined, and the reference currency.
It arises that ETNs issued by different issuers, following the same base asset, may yield different returns.
In light of the foregoing, and with the aim of enabling comparison between returns of ETNs tracking the same base asset, the directive sets rules pertaining, inter alia, to the dates on which the rate of the base index / asset is to be measured, and the reference currency for the purpose of valuating the ETN and calculating its return. In addition, the directive sets provisions on the manner of calculating the return of the ETN.
19 2 According to the directive, ETN issuers will be required to report quarterly on the returns of the ETN, the return of the ETN's base index / asset and the return of the comparison investment index.
v. Disclosure on the manner of presenting an ETN's name
This directive was published on November 13, 2012, and went into effect on March 1, 2013
The index products currently available in the capital markets are many and diverse, and include ETNs, shorts, commodity certificates, various combined indices notes, and deposit notes and covered warrants (hereinafter – ETNs or the Note Series or the Notes).
A company offering ETNs to the public is required to submit to the ISA, on force of it being a reporting corporation, various reports – immediate, periodic and other.
The multiplicity of Note Series stresses the need for simplifying the work of the investor's identification of the various Notes, by using uniform parameters appearing in the companies' reports. The ISA's staff believes that the name of an ETN is one of the key parameters in its identification. An ETN name that is inaccurate or lacks satisfactory material information may mislead and harm the public.
The field of ETNs is found in a process of regulation, in which it will move to supervision under the Joint Investments Trust Law. This directive is designed to set detailed provisions for the purpose of a similar implementation of the principle provided by the Joint Investments Trust Law with respect to mutual funds, stating that a mutual fund will not have a misleading name.
The implementation of the directive is required in all places where the companies refer to specific ETNs in their various reports to the ISA and the stock exchange. In addition, the directive determines the parameters comprising the abbreviation of an ETN, intended to facilitate presentation of the ETNs in various IT systems.
2. Extended Directives
i. Disclosure on activities in real-estate for investment
This directive was published on January 11, 2011, and went into effect with the financial statements, quarterly statements and prospectuses containing financial statements as of December 31, 2010, or any later date. On February 19, 2012, the Minister of Finance approved the extension of the directive's effect by an additional year.
The directive was published as the first phase in the horizontal project of improving statements, as part of which the ISA is examining various aspects entailed in reporting on a corporation's businesses in prospectuses
19 3 and in periodic and quarterly reports, and the manner of reporting corporations' implementation of the reporting model.
The directive aims to improve relevance, comparability (between different corporations and between reports of the same corporation in different periods) and certainty of rules of disclosure in the field of income– producing real estate. This, inter alia, by reducing duplicity in disclosure rules, arranging items of information and improving the level of their relevance – all in order to enable the investing public to make informed investment decisions.
The directive's way of achieving these goals is by interpreting the sections of the First Schedule to the Security Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) of 1969, in a manner adapted specifically to the field of income–producing real estate.
ii. Disclosure on the process of approving financial statements
This directive was published on February 21, 2011, and went into effect in the financial statements for 2010. On February 19, 2012, the Minister of Finance approved extending the effect of the directive by an additional year.
As part of the Companies Regulations (Provisions and Criteria for Financial Statement Approval Processes) of 2010, rules were set on the matter of the financial statement approval process in a public company.
Pursuant to the regulations' provisions, financial statements will be brought for discussion and approval by the board of directors, only following an approval process, the phases of which are determined by the regulations. This includes discussion of financial statements by a designated committee for reviewing the financial statements. This committee must prepare a recommendation to the board of directors on each of the issues detailed in the regulations, and deliver it to the board of directors a reasonable period of time before the discussion, while reporting to it on any flaw or problem discovered in the examination. The committee must summon the auditor to its meetings, and also notify of the internal auditor on the meetings, in which he will be allowed to participate. The board of directors will approve the reports only after holding a discussion of the committee's recommendations.
In light of the foregoing, and considering the importance to the investing public of the information on the financial statement approval process, the directive was published, setting the disclosure details on the matter of the compliance of reporting corporations with the foregoing provisions of the Companies Regulations.
iii. Disclosure on oil and gas exploration and production activities
This directive was published on March 14, 2011, and went into effect in the periodic reports for 2010. On February 19, 2012, the Minister of Finance approved extending the effect of the directive by another year.
19 4 With respect to prospectuses, the provisions of the directive will apply to prospectuses permitted for publication by the ISA after this directive's publication date, and as for immediate reports – the provisions of this directive will apply to immediate reports published after this directive's publication date.
This directive, also, is part of the abovementioned horizontal project of improving statements, as part of which the ISA is examining various aspects entailed in reporting on a corporation's businesses in prospectuses and in periodic and quarterly reports, and the manner of reporting corporations' implementation of the reporting model.
This directive, the need of which was emphasized in light of the changes and discoveries revealed in the beginning of the year, concerning oil and gas partnerships, is designed to clarify the required disclosure with respect to this field, in order to allow the investing public to make informed investment decisions.
iv. Disclosure on risks and restrictions in connection with ties with Iran or with an enemy
This directive was published on November 27, 2011 and went into effect 30 days after its publication date. On December 24, 2012, the Minister of Finance approved the extension of the effect of the directive by one more year.
The purpose of this directive is to ensure that as part of the periodic report and the prospectus, full disclosure will be provided on the degree of exposure of reporting corporations to the various bans set by law, both in Israel and outside Israel (as relevant to the corporation's activities), with respect to ties with Iran or with an enemy, insofar as such exposure is material with respect to the corporation. The directive details the required scope of disclosure, type of disclosure and the dates on which it is to be published.
v. Disclosure on the way interested parties, senior officers and institutional bodies voted in assemblies
The directive was published on November 30, 2011, and went into effect on January 1, 2012. On December 24, 2012, the Minister of Finance approved the extension of the effect of the directive by one more year.
The directive details, with respect to general assemblies in which the law requires a special majority, the corporation's duty to include in the immediate report on the assembly's results, the detailed votes of shareholders that are interested parties, senior officers or institutional bodies, all – to the best of the corporation's knowledge.
The directive includes a similar disclosure duty on the way bond holders voted in assemblies, the agenda of which includes the approval of a debt settlement, this for the same reasons as detailed above.
19 5 For the purpose of complying with the requirements of the directive, the corporations are requested that the relevant proxy statements address the question of whether the voter is an interested party, senior officer or institutional body as defined in the directive.
19 6 XI International Affairs Department
1. General
The ISA Roadmap defines the development of the Israeli capital market as one of its main goals for the coming year.
In order to fulfill that goal the International Affairs Department seeks to establish the ISA's position in the global arena as a progressive, leading body, which meets international standards by which the most advanced securities authorities in the world abide.
In 2012, the International Affairs Department promoted a number of initiatives, whose main aim was to further the position and image of the Israel Securities Authority and the Israeli Capital market globally, as a sophisticated, effectively regulated and up–to–date capital market. These steps are designed to facilitate the activities of Israeli companies abroad, as well as the activity of foreign financial entities in Israel.
Among these initiatives are bi–lateral recognition agreements with leading securities authorities around the world. In addition, the Department plays an active role in international economic forums such as IOSCO and OECD, on issues such as regulation and supervision of capital markets, cooperation on enforcement and information exchange as well as activities aiming to harmonize the Israeli securities law with exiting legislation in developed countries.
In addition, as part of the policy outlined by the ISA to continue to lead in terms of regulation both locally and internationally, the ISA joined – through the International Affairs Department – IOSCO's European Regional Committee (ERC) as a full member.
The ISA regards incorporating the Israeli capital market in globalization processes as a prerequisite to creating a competitive capital market in Israel, in order to promote the market and develop it as a vital force for economic growth.
2. Participation in international forums
a. Activity under the IOSCO
The International Securities Authorities Organization, IOSCO, is the supreme international forum for international cooperation amongst securities regulators. It has approximately 200 members from 100 countries worldwide. The organization establishes uniform policies and principles, which are adopted by its members.
IOSCO’s principles have gained international recognition as the leading criteria for financial analyses and assessments by global financial institutions, such as IMF reports, as well as the basis for financial legislation. The organization sets the agenda amongst its members – primarily world financial regulators and stock exchanges.
During the year, the Department participated in the following events and programs held by the IOSCO:
19 7 The IOSCO Annual Conference – This conference is considered one of the most significant and prestigious events in the global economic regulatory community. This year, the conference was held in Beijing, China. Discussions focused, inter alia, on the IOSCO’s strategic directions, structure of membership in the organization, the importance of adopting the organization's principles and standards (for more information, see below, under Assessment Committee), cooperation between countries, derivatives trading, systemic risk and securitization.
The ISA became a full ERC member: In 2012, a prolonged process came to an end, whereby the ISA, through the International Affairs Department, made an effort to strengthen its ties with European securities authorities in order to turn the ISA into a regular member of the European Regional Committee.
In the past year, as part of this move, the International Affairs Department participated in the ERC's discussions and meetings, presenting to the group, on a number of occasions, various aspects of Israeli securities regulation.
In October 2012, the IOSCO's board of governors approved the ISA's request to join the committee as a full member, after all 24 members of the committee approved the request unanimously.
Until now, the ISA was a member of the Africa/Middle East Regional Committee (AMERC), due to its geographical location. In reality, due to the political situation in the region, the ISA could not function as an equal member of the forum and participate in its meetings, some of which take place in countries with which Israel has no diplomatic ties. The ISA's ERC membership is in lieu of its AMERC membership.
This is a significant step for the ISA, which will enable it to exercise its full rights as a member of the IOSCO, establishing itself is a leading, up–to–date regulator which abides by international standards. This move reflects the widespread European recognition of Israeli securities regulation as high quality and professional.
Committee 4 deals with enforcement and information exchange issues under the IOSCO Agreement – the Department participated in a number of projects initiated by the Committee, such as proposed amendments to the IOSCO Agreement, interpretation of various enforcement and information exchange issues and a benchmark survey. In addition. the Department took part in outlining projects for the upcoming year regarding sanctions and use of enforcement powers beyond those included in the Agreement.
Meetings of the IOSCO MMOU Screening Group – Since joining this forum as a member in 2007, the ISA takes an active part in the screening process for entities wishing to join the IOSCO agreement. The forum actively discusses the legal infrastructure of candidates in light of the strict cooperation principles outlined by the IOSCO.
Committee 6, which deals with credit rating agencies – the International Affairs Department participates in the regulation effort of credit rating agencies active in Israel. For this purpose, and in order to capture the current developments in
19 8 this area worldwide, the Department serves as a member of this Committee and regularly participates in its meetings.
IOSCO Emerging Markets Committee – The ISA participates in the forums' discussions and meetings. This year, the Department participated in a working group which dealt with regulation of small companies, and in another team, which examined the purpose of the committee in light of the IOSCO's new organizational structure. In addition, the ISA participated in the group's annual conference, which took place in Santiago, Chile.
The issues discussed in the forum included: regulatory priorities and barriers for developing securities markets; financial stability in developing markets; the forum's future role; regulation survey of small companies.
IFRS-related activity – In continuation to the establishment of the discussion forum regarding the implementation and enforcement of IFRS within IOSCO, following the Department’s initiative, the forum held discussions regarding IFRS decisions. The ISA participated in the discussions and continued to position itself as an active player in the area of IFRS. In addition, the ISA takes part, through its Investment Department, in a work team dealing with accounting, auditing and disclosure (Committee 1), which discusses the most important issues in this area in the international arena.
Assessment Committee – During the year, the IOSCO established the Assessment Committee, of which the ISA is a member since its very inception. The Committee deals with developing and updating international securities standards which were originally developed by IOSCO, and include over 38 principles which form the basis for adequate security regulation activity. In addition, the Committee conducts assessments of securities authorities from various countries, which are members of the IOSCO, examining these principles were implemented, in accordance with a methodology developed by the IOSCO (country review).
As part of its work, the Committee has created a work team, the Systemic Risk Review Team, which is responsible for developing and updating these standards in various areas. The ISA takes an active part in the work team, which examines the standards and methodology developed by the IOSCO regarding systemic risk.
Standing Committee on Risk and Research (SCRR) – this committee was established by the IOSCO in 2010, as part of the organization's efforts to realize one of its most important goals – supervision and control of systemic risks.
The Committee created a number of working teams, which focus on relevant areas. The ISA takes part in the Work Stream 1 team, which deals with identifying methodologies for researching systemic risk (from a capital market point of view).
b. Activity in the OECD
As part of its activity within the OECD, the Department took an active part in the discussions of the Corporate Governance Committee. This year, the Committee
19 9 discussed Israel's progress in this area, as part of the third and final phase Israel has committed to in its roadmap for joining the OECD.
The discussion was based on a progress report prepared by the Department in cooperation with the International Department, the Ministry of Justice and the Government Companies Authority. The report outlines Israel's progress in this area since it first jointed the OECD (in May 2010) until the present day. The international department represented Israel in the discussion, together with representatives from the Ministry of Justice.
The report included four recommendations:
1. To increase the power and independence of the ISA and increase ex ante protections provided to minority shareholders.
The Department presented the administrative enforcement reform which was introduced in the ISA, and the growing use of these powers, as well as the ISA's authority to impose financial sanctions in cases where Companies Law provisions have been violated, such as failure to nominate external directors or an audit committee.
In addition, as part of the ex-ante protections, the following were presented: increasing the majority needed in order to approve transactions with interested parties and nominate external directors from one third to one half, and barring controlling shareholders from preventing re–nomination of external directors (Amendment 16 of the Companies Law); reinforcing institutional activism and imposing on institutional investors a requirement to participate in votes, vote, and develop a voting policy; corporate governance questionnaire; the Economic Concentration Committee and its recommendations regarding pyramidal structures; as well as the senior officers' compensation reform (Amendment 20 to the Companies Law);
2. To reinforcing supervision over auditors, including establishing an independent supervisory entity.
The team provided an update on: progress made and publication of a memorandum of law in October 2012; agreement between the ISA and PCAOB (Public Company Accounting Oversight Board) and its implementation; ISA employees participated in audits conducted the organization in Israel in June 2012.
3. reinforcing ex post protections for minority shareholders.
In addition, the team outlined the establishment of an economic court, the ISA's power to support derivative lawsuits and the corporate governance reform in bond companies .
4. Increased independence for government companies and reinforcing the Companies' Authority independence.
This issue was discussed in a separate meeting, as part of a working group on the subject of privatization and government companies, with the participation of representatives from the Government Companies Authority.
20 0 The participants praised Israel's progress and noted that the State's handling of corporate governance far exceeds the practice in OECD member countries. In addition, the high score given to Israel by the World Bank regarding investor protection (sixth place among 185 countries – Israel ranked the same as the US). The discussion was highly successful and the members of the committee were very appreciative of Israel's progress on corporate governance.
The committee summed up the discussion saying that recommendations 1 and three were fully met. Regarding recommendation 2 – the committee would like to be updated regarding legislative procedures on establishing a supervisory entity for auditors.
In addition, the meeting included elections to the Committee's Bureau. Its management cooperates with the chairman on planning and setting the agenda for meetings and outlining the committee's work plans, and constitutes a forum for general discussion of issues related to the committee's work. Members of the Bureau represent the Committee vis a vis the OECD. The OECD Council and its Directorate and committees' chairpersons interact through Bureau entities.
An ISA representative was elected as a member of the Committee's management team, which includes six representatives, out of 60 committee members from 34 countries.
An inter-ministerial steering team, which was established as part of Israel's joining the OECD, continues to develop work plans for coordinating Israel's dialog with the organization. The ISA, through the International Affairs Department, is a member of the steering team and takes an active part in its meetings.
3. Cooperation on information exchange
The Department attaches great significance to this aspect: incorporating the ISA into cooperation procedures between authorities regulating and supervising securities as an essential means to achieve the ISA's enforcement objectives. Investigations conducted by the ISA are increasingly in need of information and action outside Israel. In order to achieve optimal results, the Department cooperated with foreign authorities who are party to the IOSCO Multilateral Memorandum of Understanding concerning Consultation, Cooperation and Exchange of Information (hereinafter – the IOSCO MoU).
a. Activity under the IOSCO MoU, its main points and parties thereto
One of the main elements of the ISA’s enforcement activity is its being party to an agreement under the multilateral cooperation agreement between foreign authorities which are members of the IOSCO. Presently, 90 authorities are party to the IOSCO MoU, many of whom are among the most significant leaders in this field worldwide, such as the US, Canada, the UK, France, Germany, Japan, China, Brazil, India, and Australia.
(i) Main points and parties of the IOSCO MoU
1. Mutual assistance and exchange of information between authorities shall be for the purpose of enforcement and supervision of the laws of the
20 1 requesting authority. Assistance is to include the gathering, seizing and transfer of information and documents to foreign authorities, as well as assisting in investigating and gathering testimony from alleged violators of the securities laws of the foreign country.
2. Cooperation between authorities is subject to the local laws applicable to each Authority.
3. Assistance shall be provided, inter alia, in investigations and enforcement of laws pertaining to the following issues:
(a) Inside information, market manipulation, false reporting;
(b) Listing, issuing, offer or sale of securities and reporting requirements thereof;
(c) Market intermediaries, including licensed or registered investment advisors, joint investment brokers, dealers and transfer agents;
(d) Markets, stock exchanges, clearing houses, and settlement entities.
4. The agreement bears no expiration date, but each Authority may terminate it at any time by submitting a 30–day notice.
5. Signatories to the IOSCO MoU as of the end of 2011 are: Albania, Alberta (Canada), Australia, Austria, the Bahamas, Bahrain, Belgium, Bermuda, Brazil, Bosnia, British Columbia (Canada), BVI, Bulgaria, the Cayman Islands, China, Columbia, Croatia, Cyprus, the Czech Republic, Denmark, Dubai, Egypt, El Salvador, Estonia, Finland, Macedonia, France, Germany, Greece, Guernsey Island, Hong Kong, Hungary, Iceland, India, Isle of Man, Israel, Italy, Japan, Jersey Island, Jordan, Kenya, Korea, Lichtenstein, Lithuania, Luxembourg, Malaysia, the Maldives Islands, Malta, Mauritius, Mexico, Montenegro, Morocco, the Netherlands, New Zealand, Nigeria, Norway, Oman, Ontario (Canada), Pakistan, Peru, Poland, Portugal, Quebec (Canada), Romania, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Srpska, Sweden, Switzerland, Syria, Taipei, Tanzania, Thailand, Tunisia, Turkey, the UK, United Emirates, the US, West African Monetary Union and Uruguay.
(ii) Requests for assistance and judicial inquiries between the ISA and foreign securities authorities
The Department was in charge of handling incoming requests for assistance from foreign authorities as well as the ISA’s requests from foreign authorities. Requests for the transfer of information and assistance in judicial inquiries were made by direct contact between authorities, and – in lack of an agreement – via the International Department at the State Attorney’s Office, under the Legal Assistance between States Law of 1998.
As part of handling requests for assistance, the Department organized, in cooperation with the Head of the Investigations, Intelligence and Trading Control Department, judicial inquiries abroad.
20 2 In 2012, the ISA received 12 requests for assistance, four of which were "fit and proper" assessments and two were voluntary updates. The ISA sent five inquiries requesting assistance, and continued to handle inquiries submitted in 2011.
4. Bi-lateral recognition
In 2011, the European Securities and Markets Authority (ESMA) decided to recognize Israeli regulation regarding the content and format of a prospectus in accordance with the Securities Law. As a result, the Department has been actively pursuing cooperation with regulators in the European Union and bi–lateral recognition agreements.
In particular, the ISA is making progress on this matter with the British Financial Services Authority (FSA). It is seeking an agreement which would recognize Israeli regulation regarding prospectuses, thus facilitating access to the British capital market for Israeli issuers. In addition, the ISA is seeking to amend its agreement with the Autorité des marchés financiers (AMF), in accordance with the abovementioned decision by the ESMA.
In addition, the ISA strives to further bi–lateral recognition agreements addressing prospectus filing and ongoing reporting outside Europe.
The ISA believes that engaging in such bi–lateral agreements with foreign regulators will grant Israeli companies access to new markets and additional foreign investors.
5. Study delegations
As part of ISA’s effort to achieve harmonization with securities legislation in developed countries and in order to update on financial trends, the Department initiated several instructional trips abroad::
A study delegation on encouraging private enforcement – the Department conducted an instructional seminar in the US for the purpose of studying the private enforcement field (securities class actions, derivative lawsuits, private lawsuits). The delegation included the ISA's Head of Private Enforcement (class actions, derivative lawsuits and civil suits), as well as an employee of the Legislation Department, who met with academic specialists, a judge and private practice lawyers.
Study delegation on enforcement – the Department organized an instructional seminar, which included meetings with American economic enforcement entities, in order to study the subject.
The delegation included representatives from the ISA's Head of the Investigations, Intelligence and Trading Control Department, Administrative Enforcement Department, District Attorney's office and International Affairs Department.
The delegation met with: representatives of the Securities Exchange Commission (SEC) – where a number of meetings were held, which included discussions on the following issues: methods for interrogating witnesses, enforcement procedures conducted by the ISA, collecting intelligence, cooperation of witnesses and compensation of information providers; FBI representatives to discuss cooperation between criminal enforcement authorities; the New York Stock Exchange (NYSE) and FINRA (Financial Industry
20 3 Regulatory Authority), where various issues were discussed, such as supervision of trading, market structure, algo–trading and shorting, and a tour was taken of the trading floor; the Skadden law firm, one of the largest in the US, where white collar offenses and procedures with the SEC were discussed; the New York County's District Attorney's Office, where the delegation learnt about its work procedures and how economic cases were built for the court as well about NYPD's intelligence unit.
US capital market study delegation – as in every year, the Department participated in organizing the ISA’s annual delegation to the US, which includes a visit of ISA representatives to a number of regulatory authorities and capital market players, in order to learn about various developments in the US capital market. This visit focused on the following issues: broker–dealers, regulatory levels and analysis of regulatory cost effectiveness.
6. Strengthening ties with foreign authorities and other entities
Hosting a visit by the chairman of the German Securities Authority (BAFIN) – the chairman of BAFIN arrived in Israel for a working visit and met with the Chairman of the Israel Securities Authority, Prof. Shmuel Hauser, with the aim of furthering cooperation between the authorities and learning about the ISA's regulation model. BAFIN serves as a leading member of IOSCO's European Regional Committee.
Hosting a visit by representatives from China's securities authority (CSRC) – a number of representatives from the CSRC arrived in Israel for a work visit, in order to strengthen the ties between the authorities. As part of the visit, the ISA presented to the guests the structure of Israel's capital market, the ISA's BI system and its model of supervision over trading platforms.
Hosting a delegation of representatives from Australia's financial sector – a delegation of 20 representatives from leading financial entities in Australia arrived in Israel in order to learn about the Israeli capital market and its regulation models. As part of the visit, the representatives learned about the structure of the Israeli capital market, supervision model and the ISA's key projects.
7. International Monetary Fund (IMF)
In continuation to the IMF's assessment procedure in 2011, following which it issued an extensive report in April 2012, the IMF published an additional report – Crisis Prevention and Management. In addition, in December 2012, an IMF work team visited Israel. As part of the visit, various issues were discussed – upon the IMF's request – including the implementation of the IMF's recommendations in the FSAP (Financial Sector Assessment Program) Report (which was extensively reviewed in the ISA's 2011 Annual Report). In addition, a review of the status of the Israeli capital market was conducted.
8. Activity as part of the Committee for Implementing the Prohibition on Investing in Corporations Dealing with Iran Law
On April 2, 2008, the Prohibition on Investing in Corporations Dealing with Iran Law of 2008 (hereinafter – the Iran Law) was enacted. Its purpose is to prevent investments by Israeli financial institutions in corporations that have material business relations which
20 4 contribute economically – whether directly or indirectly – to Iran. The Law is part of the international effort to prevent Iran from developing unconventional weapons which threaten the existence of the State of Israel.
Under the Law, financial institutions are prevented from investing in corporations included in the list published by the Committee. The term "financial institution" includes mutual fund managers, as defined by the Joint Investments Law.
An inter-ministerial implementation committee was formed under the Law, charged with drawing a list of corporations having material business dealings with Iran. The committee, headed by the Ministry of Finance, is developing the said list. The Israel Securities Authority, through the International Affairs Department, is a member of the implementation committee, contributing to its work on an ongoing basis.
20 5 XII Information Technology Department
1. Electronic Reporting – MAGNA
The electronic reporting project is a web–based information system for the collection and distribution of the entire range of reports required of entities subject to ISA's supervision: corporations, mutual funds, investment advice firms, portfolio management firms, investment marketing firms and underwriters. The system is designed so as to harness electronic communications technology and the internet to service the investing public and entities supervised by the ISA.
The system handles all types of reports, including: prospectuses, annual financial statements, interim financial statements, immediate reports, reports on changes in the holdings of principal shareholders, reports on private allocations, purchase offer reports and reports on conflicts of interest in corporations. The system also handles prospectuses, immediate reports and monthly reports of mutual funds, forms for portfolio management companies, etc.
The system's objectives are as follows: to provide the public with immediate access to public information; equal distribution of information; increase efficiency of supervision over the reliability of information; and to provide new analysis tools.
Between the date on which the system first became fully operational (in November 2003) and the end of 2012, thousands of authorized signatories have signed up to use the system, 808,800 different reports were handled, including 97,348 in 2012 alone. These reports reached ISA staffers automatically, through the reporting website. Public reports were automatically distributed through the distribution website, as well as to the Stock Exchange and commercial information distributors. Thousands of users surf the system’s website (www.magna.isa.gov.il) daily, accessing the various reports of the aforesaid entities as well as processed data reports.
The system is among the most advanced of its kind worldwide, and is based on the most updated and advanced technologies in existence today. It provides technological solutions to such complex issues as unequivocal identification of report filers and information security and has won a number of prestigious IT excellence awards.
For the seventh year running, the system played a significant role in the ISA’s winning the Accessible Governmental Agency Award, in a competition conducted by the Finance Ministry among all Government ministries and public sector entities in the field of public service IT systems.
During 2012, a significant number of improvements have been implemented, such as: development and implementation of new versions and adjusting reporting forms to current legislative changes; development of a module which enables reporting for additional entities; improvement of reporting mechanisms, as well as technological upgrades.
In addition, the MAGNA system underwent changes and improvements, which were pretested prior to full implementation. The external supplier was also tested for
20 6 compliance with the SLA (service level agreement). In 2012, nine versions – which featured 298 system changes – were implemented and tested.
The following is a table summarizing MAGNA activity for 2012:
Table 30: MAGNA activity data for 2012
Total no. of reports submitted through MAGNA – annual 97,348
Total reporting volume for 2012 28.99 GB
Total no. of public MAGNA reports – annual 76,926
Total no. of non–public MAGNA reports – annual 20,422
Total no. of MAGNA reports – annual – Israeli corporations 67,789
Total no. of MAGNA reports – annual – dual listed corporations 2,857
Total no. of MAGNA reports – annual – mutual funds 22,544
Total no. of MAGNA reports – annual – underwriters 236
Total no. of MAGNA reports – annual – investment advice firms 124
Total no. of MAGNA reports – annual – portfolio managers 2,643
Total no. of MAGNA reports – annual – investment marketers 388
Total no. MAGNA reports – annual – trustees 369
Total no. MAGNA reports – annual – purchase offers 100
Total no. MAGNA reports – annual – banks 294
Total no. MAGNA reports – annual – bond trustees 4
Total no. of active forms on MAGNA 442
Total no. of active forms on MAGNA – Israeli corporations 147
Total no. of active forms on MAGNA – dual listed corporations 27
Total no. of active forms on MAGNA – mutual funds 103
Total no. of active forms on MAGNA – trustees 16
Total no. of active forms on MAGNA – investment advice firms 28
Total no. of active forms on MAGNA – portfolio managers 34
20 7 Total no. of active forms on MAGNA – bank managers 14
Total no. of active forms on MAGNA – trustee managers 25
Total no. of active forms on MAGNA – purchase offers 11
Total no. of active forms on MAGNA – bond trustees 3
Total no. of active forms on MAGNA – investment marketers 28
Total no. of active forms on MAGNA – trading platforms 6
Total no. of active signatories MAGNA (valid) 2,410
Main Activities in 2012:
a. Infrastructure upgrades
Due to technological progress and new software and hardware products on the market, the Department started to develop the MAGNA system’s third generation. in 2012, the Department upgraded the information distributors’ website using updated technology. In addition, the system's interface and administrative capabilities were finalized.
In addition, ongoing urgent infrastructure upgrades were performed – such as support for Microsoft’s Windows 7 (32 bit) and new browsers. In addition, the Department began developing a new conversion tool to PDF for MAGNA forms.
b. Trading platforms and exchange-traded notes (ETNs)
Due to legislative changes, the Department defined and characterized, within the MAGNA systems, dozens of new reporting forms for trading platforms and exchange traded notes (ETNs) in preparation for the time when these entities' reporting requirements come into effect.
c. MAGNA system administration
Another MAGNA–related field is system administration and handling of reporting entities and persons authorized to report, including those applying for authorized person status. This year, the ISA processed 2,213 forms authorizing or canceling authorized signatories and certificate extension applications; 51 new entities were registered, and 223 detail update forms were processed. During the year, 39 entities changed their names, and 205 entities updated their details on MAGNA. . In addition, the ISA sent hundreds of inquiries to corporations due to discrepancies between reported data (such as incorrect ID numbers), and hundreds of additional inquiries to companies for failure to meet the statutory requirements for the minimum number of authorized corporate signatories. Furthermore, the ISA processed 46 cases of corporations which either ceased operations or were no longer able to qualify as reporting entities, improved its database concerning principal shareholders and replied to inquiries and questions submitted by
20 8 reporting entities. In addition, approximately 2,000 identification number verifications were carried out, mainly for advisor licensing applicants.
2. Document archiving and automated office
The system allows for the archiving of all types of internal and external documents, including documents received electronically, whether by fax or in paper form (the latter type is scanned into the system). The system enables to locate and retrieve any document, by type, according to specified criteria or free text.
The system is one of the most essential tools at the ISA, and is also used by the MAGNA for archiving and retrieving reports, some of which are distributed to the public as well (see Section 1 above). It also includes the AMIGO System, which electronically archives media clips. In addition, the system includes standard automated office functions, such as: internal and external e–mail, task management, appointment calendars, contact management and workflow. The system, which includes numerous proprietary features, is based on Lotus Notes Domino.
Main activities in 2012:
a. New interfaces
In 2012, the Department created new interfaces with other ISA IT systems which rely on the archive, including: the human resources system, accounting system, search system, organizational portal, IDM system, YAEL and MAGNA administration.
b. Adjusting existing interfaces
In 2012, the Department adjusted existing interfaces to IT systems updated throughout the year, including the MAGNA distribution site, TEHILA payment system, the Ministry of Finance and DLP system.
c. New applications
In 2012, two new applications were developed for the digitized archive environment. The first one is a system for locating users and quick retrieval of their entire contact details (phone numbers, mobile phone number, department, etc). The second application is a brand new system for collecting external intelligence, in lieu of the outdated AMIGO, which is no longer in use (please see Section 5 below).
d. Ongoing maintenance
In 2012, new archives were created for the ISA's Human Resources Unit, as well as for the Administrative Enforcement Committee. In addition, unique procedures have been developed to support the committee's work, including creating new forms and reports for the Committee as well as for other ISA departments.
e. Work plans follow–up system
In 2012, a new system for managing departmental work plans was introduced into the computerized office environment. The system enables each department manager or its representative to propose an annual work plan, and prescribe issues, sub–issues and milestones for progress, including deadlines. After obtaining
20 9 approval from the ISA chairman, the plan becomes mandatory, and each department updates its progress in terms of milestones, so that it can easily be gauged at any given moment.
This system enables the ISA chairman, department heads and other authorized employees to be "hands on" in terms of progress on various issues, and determine at any given moment whether there has been a delay, when, and the reason for that delay. When developing the system, special attention was given to matters being simultaneously handled by a number of departments, so as to make sure they are fully synchronized.
3. Operational system
During 2012, the Department continued to develop and maintain the central computer system, which includes most of the information handled by the ISA: data on companies, mutual funds, investment advisors and portfolio managers, trading data, as well as data used by all ISA employees. In 2012, hundreds of requests for system changes and improvements were carried out, covering a broad range of issues
Main activities in 2012:
The main IT developments carried out in 2012 were as follows: reasonable returns test report: monthly report on credit risks; corporate governance reports; new interfaces for transmitting data to a promotional site; creating an interface with an external company assisting the ISA in running exams for investment advisors; creating an infrastructure for trading platform information input; follow up on archiving of investigative files; creating payment vouchers for annual fees; building a system for managing administrative fines; adjusting the operational system for Windows 7 and Active Directory; input of iSOX questionnaire; and input of voting results arriving through MAGNA.
4. The ISA website
During the year, the ISA website (www.isa.gov.il) was regularly updated with new content: information about the ISA; information on new legislation and regulations; news and publications; updated lists of supervised entities; as well as FAQs handled throughout the year.
Main activities in 2012:A procedure for updating content on the website was instated, with the purpose of fully standardizing the content. In addition, the Department began developing a new website using new technologies and up–to–date design.
5. Central Information System (CIS) – AMIGO
The CIS is a computerized information and knowledge management system with the following capabilities: collecting information and importing it into the system automatically and/or manually; retrieving data objects within the input collected from various sources; processing and analyzing the information; discovering and presenting relationships between entities; knowledge production; archiving information in the ISA archive; managing and distributing raw and/or processed information to ISA employees via the ISA’s e–mail system.
21 0 In 2012, this outdated system was completely replaced, and a new system with improved capabilities was introduced to the ISA's main archive environment (please see Section 2 above). During the year, approximately 128,000 information items were planted into the ISA archive, bringing the total number of items planted into the system throughout its existence to 1,582,689.
6. Computing for the Head of the Investigations, Intelligence and Trading Control Department
a. Forensic Computing
The Head of the Investigations, Intelligence and Trading Control Department's advanced forensic computing system was built approximately three years ago, and has fully proven itself . The improvement and streamlining of the Investigations Department's activities are apparent and almost every case includes a large amount of information and documents. The system includes a server and significant storage space, along with sophisticated search and retrieval software, which allows users to copy and search vast quantities of electronic information. This year, the Information Technology Department implemented a large scale upgrade of the forensic system on a number of levels: the entire communications system was upgraded to high– speed optical fiber structure; servers and information processing stations were upgraded to the best hardware available, and the entire storage system was upgraded to high–redundancy, high–performance hardware. In addition, the storage system capacities were increased, so as to meet the needs as well as the increase in investigative information volume capacities.
b. Vault
At the Investigations Department's request, the Information Technology Department has purchased a “vault” for secure transfer of documents and information between the ISA and banks. This "vault" is to be used both for future receipt of incoming checking account files and for the receipt of securities account files which are presently transferred using CDs. This year, the use of the system has significantly increased: it was used not only between the Investigations Department and the banks – other interfaces, for other needs, were created various entities, including the Bank of Israel, external information providers and a company assisting the ISA in conducting exams for investment advisors and portfolio managers.
c. Entity and relationship system
At the Investigations Department's request, and with the cooperation of its staff, the Information Technology Department took part in characterizing, indentifying the needs and preparation of an RFP for an entity–relationship system. The system will serve the Investigations Department staff in managing investigations and intelligence processes, including entity–relationship management and search of internal and external databases accessible through the internet. The new tender was published in 2012. The Department expects to select a winner and begin the development phase in 2013.
21 1 7. Forms and payments system
During 2012, additional ISA online forms were uploaded to the Government payments server, activated by the TEHILA system. The forms are intended for use by various sectors in order to access the ISA on different issues. In 2012, approximately 20,000 forms were submitted and payments totaled approximately NIS 9.2 million.
The system transfers all forms filled by users and payments to the ISA’s internal information systems over the internet, in real time. The data is available to users (through the use of a personal code) on the ISA website, where users can receive accurate and reliable information regarding the updated status of their inquiries.
The interface with TEHILA also serves for the transfer and receipt of information for pension plan advisors and marketers, who are tested by the ISA, as a service for the Capital Market's Division at the Ministry of Finance. Due to the importance of this interface, it was significantly updated during the reporting year – and the forms and payments are created using the most advanced technology available. Following the upgrade, the ISA was able to update dates, fees and other information on the various forms, which was previously impossible.
8. BI Irregular Trading System
The BI system was created following a decision made by the ISA and the Stock Exchange to require an unequivocal identification number (representing the 214 selling or purchase account) to be used along with other Exchange trading data, due to the growing number of traded securities and since the irregular trading system is outdated and no longer meets current needs. Thus, it was decided to set up a new information system to research trading data at the ISA, based on the most advanced concepts and technologies available today in the field of BI (Business Intelligence). The purpose of the system is to automatically confirm or refute irregularities, as far as possible, thus enabling the ISA’s employees to handle events which clearly constitute unexplained irregularities.
In 2012, three new versions of the systems were developed, which included, inter alia, the following issues:
Adding, improving and calibrating irregularities definitions for the Investigations Department as well as for the Investment Department; creating a balance world; creating a transaction clearing world; adding calculated fields for various subjects; creating a bank advisors' world; enriching the system with input regarding underwriters and ETNs; adding a module to ensure proper reporting of unequivocal identifiers from the Stock Exchange.
9. Knowledge management – search tools
The information and knowledge residing in the ISA and used by its employees are derived from internal information systems, external sources, and the employees themselves. The ISA's information resources include a large number of systems handling a variety of matters and employing a broad range of technologies and methods.
21 2 Furthermore, ISA employees hold much knowledge requiring documentation, such as email documents and correspondences, undocumented phone calls, insights, etc.
In 2012, the Department completed the system, which is designed to serve ISA employees for at least five years. After the training and assimilation phase, which is expected to start at the beginning of 2013, the system will be fully usable for all databases.
10. Knowledge management – organizational portal
As part of the ISA’s knowledge management project, the Department initiated the establishment of an organizational portal, which provides users with a convenient, simple visual tool for collecting necessary information from all ISA IT systems. There are two separate and joint purposes for establishing the portal: To reinforce the management, sharing and free flow of organizational information for the professional content environment of the Israel Securities Authority; to create a uniform desktop for senior ISA officials that would provide them with immediate and convenient access to information and tools at their disposal.
During 2012, the Department prepared an RFP for the system. The tender was published and a winner was selected. In addition, the system was characterized and hardware procured. The system is expected to be finalized in 2013.
11. Human Resources system
At the request of the Secretary General, and in cooperation with the administration staff, the Information Technology Department participated in the Human Resources System project. The purpose of the system was to meet the needs of the ISA’s human resources, including: management of employee files; management of recruitment, screening and orientation processes; organizational structure; occupations, positions and roles; training and continuing education; vacations and personal occasions; employee assessments; employee promotion; employment terms and benefits; welfare; discipline and recommendations; termination of employment, etc.
The development of the system began in 2011, and it became operational in 2012. The department provided users with support through the training, assimilation and activation phases .
12. Integrated Voting System
In 2012, the ISA decided to create a system which would enable voters to vote online in shareholders' meetings reported on the MAGNA. For this purpose, a voting website is created, which would enable any security holder – following a secure identification process – to vote online on issues in meetings (as reported on the MAGNA invitation forms) of companies whose securities he/she/it holds.
As part of the voting system, the ISA will activate a secure email system (the YAEL system) from the ISA to the companies and signatories thereof. As part of this activity, each authorized party shall have access (using a token issued by an authorizing entity) to a specific site in which it would be able to retrieve its correspondence with the ISA.
21 3 Shortly before the vote, the voting system transfers to the company – through the YAEL system – the results of the online shareholders' meeting (this is done so that the company can determine whether there is a quorum for conducting the meeting). At the end of the process, the online meetings data, voting process log and results of the online meeting votes are transferred to the ISA archive, as are other data.
In addition to the technical implementation of the project, a legislative process is underway. The latter is to support the various processes, timing and activity of the system. The two courses of action are needed in order to activate the system.
In 2012, the YAEL system was finalized, as were the legislative amendments required for its activation. The Department conducted a pilot experiment with approximately 50 volunteer companies, and is currently making the final required changes. The system is expected to become fully active in the first quarter of 2013.
In order to create the voting system, many characterization meetings were held with various players in the capital market, who will be using the system (banks, non bank Stock Exchange members, institutionals of various types, and other companies which hold general meetings), so as to ensure that the system is in line with their expectations and needs. In 2012, the Department also completed the development of the voting system, and its acceptance tests were successfully finalized. The system will be activated after the legislative infrastructure is in place.
13. Infrastructure: servers, communications, and information security
During 2012, extensive improvements were made to the ISA's IT infrastructure, including:
Upgrading of server infrastructure and storage equipment in both ISA sites, to more advanced equipment, with higher storage capacity and quicker performance, which enables – inter alia – mutual backup of the various ISA sites.
Upgrading of communications networks in both ISA sites (Jerusalem and Tel Aviv) with advanced components, including complete redundancy, so that any malfunction in a communications line will result in automatic activation of an alternative backup line.
Upgrading of various information security tools protecting the ISA against break–ins, malware of various kinds and viruses. In 2012, the ISA's firewall and DLP system were upgraded as well.
Introducing new information security tools in order to increase protection against possible cyber attacks, such as NAC and Backbox systems, which were activated in 2012 for the first time.
This year, an IDM (Identity Management) product was introduced, whose purpose is to manage users and entities and synchronize all of the ISA's IT systems.
Ongoing maintenance of all systems, updating of procedures and service level control for internal and external users.
Continued updating of all outdated PCs, printers and operating systems.
21 4 Transitioning project from Novell to Microsoft environment: During 2012, the ISA carried out an extensive conversion project of the entire ISA IT infrastructure into Microsoft environment. The Department purchased the necessary hardware and storage capacity, mapped and converted workstations, operation system and all files and software used by ISA employees. In addition, the ISA converted the central management system for servers and end stations. The project was successfully completed, with all ISA departments transitioning into the new environment in a gradual, controlled manner.
Setting up a video conference system, based on a Microsoft product, which enables ISA management to conduct real time video conferences with each from both sites (Tel Aviv and Jerusalem).
Enhanced support for remote connection by ISA employees. Currently, the Department supports 135 employees who are eligible to log in remotely after working hours, in addition to 170 smart devices of various kinds (such as Blackberry phones, iPads and iPhones).
Such activities – mainly in the area of infrastructure and information security upgrades – will continue in 2013 as well.
14. ERP for accounting
This system includes a number of modules: account management; adjustments; payments; proceeds; client contact information; budget planning and management, including budgetary controls; inventory management; procurement process management, including approvals, equipment registration and payments; property, plant and equipment ledger. In addition, the system is implemented so as to service the ISA's procurement processes and provides managers with budgetary reports and controls.
In 2012, the Department began an extensive process of developing an invoice archiving mechanism, which will result in digital automatic saving – in the ISA's computerized archive – of all invoices that the accounting unit is required to save by law.
15. Building a new computer room in Jerusalem
Due to the lack of room in the Jerusalem site, and inability to expand, the ISA decided to move its computer room to a new location, which has a much larger area than the current computer room. In 2012, the ISA supported the building of the new state-of-the- art computer room, and defined all necessary infrastructure: server cabinets and communication equipment; power systems and air conditioning; UPS systems and emergency generators; fire detection and extinguishing system; command and control systems for unusual events; security and defense systems, etc. The Department is expected to complete the new computer center in the first quarter of 2013, and will transfer the equipment and systems to their new location following a thorough planning process.
21 5 XIII Administrative Enforcement
1. General
At the beginning of 2011, the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments) of 2011 became effective. The Law established a new administrative enforcement mechanism which would exist side by side with the criminal enforcement system under the Securities Law.
Under the Law, an enforcement committee which includes six members was established. The committee consists of two panels of three members each, who are ISA employees. Their only role at the ISA is to serve as chairmen of the administrative enforcement panels. The other four members of the committee were nominated, pursuant to the Law, by the Minister of Justice, and include two lawyers and two capital market professionals.
In December 2011, the Administrative Enforcement Committee published its working procedures, as required by law. Their publication marked the launch of the administrative enforcement mechanism.
According to the Securities Law, administrative enforcement proceedings against violators are opened following a decision by the ISA chairman. Thus, the ISA established an Administrative Enforcement Department, which develops administrative claims for the ISA, following the findings of administrative probes forwarded by the Investigations, Intelligence and Trading Control Department.
The Administrative Enforcement Department then handles the case for the ISA, in front of the Administrative Enforcement panels. The proceedings in front of the Committee include enforcement proceedings due to administrative violations of the Securities Law, the Investment Advice Law and the Joint Investment Law. In addition, the Committee discusses suspension and revocation of individual licenses due to reliability issues, under the Investment Advice Law.
The abovementioned law also grants the Chairman of the ISA the power to reach enforcement arrangements with violators in lieu of conducting proceedings against them. The Enforcement Department conducts, on behalf of the ISA chairman, negotiations with violators for the purpose of reaching such arrangements. Following the development of such an arrangement, it is brought to the approval of the Administrative Enforcement Committee, as required by Law.
In 2011, as part of the administrative enforcement mechanism, the Department developed criteria for establishing an internal enforcement program for securities and investments. In August 2012, after administrative proceedings have been implemented and the ISA has collected inquiries from the public regarding the implementation of the criteria, the Department published FAQs on the issue.
In addition, in July 2012, the ISA published on its website criteria for distinguishing between cases requiring criminal investigations and those befitting administrative probes, outlining the three general considerations prescribed by Section 52w of the Securities Law on this issue and giving them substance. The criteria were developed by
21 6 the Administrative Enforcement Department based on the ISA's enforcement experience and following consultations with various factors both within the ISA and outside it.
During 2012, since the administrative enforcement mechanism was introduced, the Administrative Enforcement Department handled 11 administrative cases, seven of which were followed up by administrative proceedings: in four cases, the administrative proceedings panels were served administrative claims regarding various violations, and in three cases – a committee panel was asked to approve an enforcement arrangement; one case was closed, and the remaining cases are still being reviewed by the Department.
Table 31: Administrative cases opened in 2012 Type of violation No. of cases Missing reports 1 Misleading detail in shelf offering 1 Securities fraud (self-dealing transactions) 3 Violations of the Investment Advice Law 2
During its first year, the Administrative Enforcement Committee published its decisions on two enforcement arrangements and two administrative cases which were fully handled by it.
The following is a summary of the decisions of the Administrative Enforcement Committee panels:
2. Administrative enforcement proceedings
Administrative Case 2/12 Israel Securities Authority v. Raphael Dahan
On November 14, 2012, a decision of the Administrative Enforcement Committee panel was published regarding Administrative Case 2/12 Israel Securities Authority v. Raphael Dahan, which was handed down on September 13, 2012. The panel stated in its decision that Dahan committed 77 administrative violations under Section 54(a1)(2) of the Securities Law – manipulation of securities by way of self dealing transactions. Regarding 34 additional self dealing transactions Dahan performed during this period, the panel stated that he did not meet the definition of "investor in securities" at the time they were performed, as required for administrative violations, and thus – they do not constitute violations.
Dahan, who is a day trader, was often active in the continuous trading phase in SR Overseas Investments Ltd.'s stock (currently the Lahav LR Real Estate Ltd. stock) and performed – between February 2011 and January 2012 – 77 self dealing transactions using accounts under his control. As part of the self dealing transactions, he bought and sold the stock almost simultaneously, so that buy orders in one account "met" sale orders in another. The panel stated, that in acting so, Dahan influenced the price of SR Overseas Investments Ltd.'s stock while violating the provisions of said section.
As a result, the panel imposed on Dahan a NIS 50,000 financial sanction, noting that it has taken into account, inter alia, the respondent's personal circumstances and the deep
21 7 regret he expressed, as well as the fact that this was a first discussion of such a violation under the administrative enforcement mechanism, as well as the ISA chairman's policy of imposing moderate sanctions during the first year of implementation.
The panel stated that Dahan's actions constituted a prohibited manipulation, since the two types of transactions void each other, lack economic grounds, substance or logical basis in the world of trading, except for theirs expected influence on the stock's price.
The panel accepted the claim that, relying on the explanations in the bill, violations under the Administrative Enforcement Law require a mens rea of negligence at most, with some administrative violations requiring proof of negligence (as deduced from the use of the terms "should have known" or "negligently") and others not addressing the issue of negligence and thus requiring a lesser degree of mens rea – strict liability.
Regarding proving the "influencing price fluctuations" component, the panel provided a broad definition of the term, concluding that the "influencing price fluctuations" component is not directly expressed by changes in stock prices, but rather indirectly – by creating an artificial trading volume through the transaction, even if the self dealing transaction did not cause – in and of itself – the price of the stock to change in relation to the former transaction. Since creating a false trading volume points to alleged interest by investors and may tempt other investors to trade in the stock based on that false impression, it may thus create fluctuations in the price of the stock.
The panel accepted the ISA's claim that, in this proceedings, the burden of proof lies on the ISA, similarly to the burden of proof in rulings of administrative law, and the burden is to lay before the deciding administrative authority (in this case, the Administrative Enforcement panel) an evidential framework which a reasonable authority would rely on for the purpose of making said decision. The panel relied on the Israel Security Authority's interpretation of this test, as requiring, in effect, a level of proof of tipping the probability scale, as is the accepted test in civil law.
Administrative Case 3/12 Israel Securities Authority v. Israel Hazut
On February 25, 2013, a decision of the Administrative Enforcement Enforcement Committee panel was published regarding Administrative Case 3/12 Israel Securities Authority v. Israel Hazut, which was handed down on December 27, 2012. The panel stated in its decision that Hazut committed 28 administrative violations under Section 54(a1)(2) of the Securities Law – manipulation of securities by way of self dealing transactions. Regarding 21 additional self dealing transactions, the panel stated that there was no proof that these transactions included the price influence component necessary in order to establish the administrative violation, since some of the transactions did not result in a price change for the security in relation to the last transaction or resulted in a minute price change. In addition, no proof was provided that these transactions included indirect influence by "inflating trading cycles".
For these violations, the panel imposed on Hazut a NIS 135,000 financial sanction, NIS 35,000 of which are to be paid in full and NIS 100,000 of which constitute a suspended financial sanction, to be paid by Hazut it he violate Section 54 of the Securities Law, during the course of one year, either by way of an administrative or criminal violation. In deciding the sanctions to be imposed on Hazut, the panel took into account his bad health and dire economic situation. The suspended financial sanction was imposed on Hazut after the ISA proved that Hazut continued to perform self dealing transactions
21 8 even after the administrative probe against him was launched, albeit in smaller numbers.
The panel stated that Hazut, who is a day trader, often dealt in Nisco Industries (1992) Ltd.'s stock using accounts under his control, through an FMR station made available to him by a member of the Stock Exchange, and performed – between February 2011 and January 2012 – 28 self dealing transactions, in which he purchased the shares through one account and sold them through another simultaneously. In this context, the panel noted that the simultaneity requirement for self dealing transactions is established when a counter order is given minutes after the first order or even a few hours later, since – in both cases – the transactions occur one after the other. The panel added that these transactions directly influenced the price of the stock, in a clear and distinct manner.
Regarding the definition of "securities investor", the panel stated that in order to adequately define the term "actions" under this definition, the number of orders given should be examined (including orders which were not carried out) in the three months prior to the beginning of each month of the violation period.
The panel added that the mens rea needed in order to prove a manipulation violation is strict liability. However, the panel members failed to agree on whether each administrative violation which does not specify the required mens rea is a violation requiring strict liability, and the issue remains "under study".
The issue of burden of proof required in administrative proceedings under the Securities Law also remains "under study" in this case, due to a dispute between members of the panel on this issue.
3. Enforcement arrangements
The issue of burden of proof required in administrative proceedings under the Securities Law also remains "under study" in this case, due to a dispute between members of the panel on this issue:
On February 19, 2012, an Administrative Enforcement Committee panel approved the enforcement arrangement between the Chairman of the Israel Securities Authority and Mivtach Shamir Holdings Ltd., The Tnuva Group, Ap. Tn. Ltd. (Apax) and its holding corporation (hereinafter, together – the respondents), which was signed on January 25, 2012. According to the arrangement, the respondents did not admit to the facts and violations found by the ISA, but were ready to pay an agreed upon financial sanction and take steps to remedy the violation and avoid its recurrence.
The enforcement arrangement was signed in lieu of a full administrative proceeding for committing administrative violations of failing to file reports (annual and quarterly) and failure to attach the financial statements of the holding corporation and Tnuva Group for the period between the annual financial statement as at December 31, 2010 and the financial statements as at September 30, 2011. The respondents were attributed two violations for each report, which stemmed from the fact that Mivtach Shamir's reports were not filed, as required, nor were the reports for the holding corporation and the Tnuva Group, totaling eight violations of Subsection (2) of Part C of Amendment 7 to the Securities Law.
21 9 Under the arrangement, enforcement measures were imposed on the respondents: a financial sanction of NIS 15 million and a commitment to take action to remedy the violation and prevent its recurrence. The financial sanction was divided among the respondents according to their decision, which was specified in the arrangement, so that Mivtach Shamir paid NIS 4 million, the Tnuva Group paid NIS 7.5 million and Apax paid NIS 3.5 million. In addition, the respondents undertook to take steps to remedy the violation by way of restating Mivtach Shamir's financial statements, as of the first quarter of 2008, as well as to attach Tnuva's financial statements for 2010 and 2011. In addition, the respondents committed, as part of the arrangement, to meet disclosure requirements in the future, provided that Tnuva continue to constitute a significant part of Mivtach Shamir's business.
Mivtach Shamir is a publicly traded company which purchased – along with the Apax Fund – approximately 76% of Tnuva Group's stock. The joint acquisition was made at the beginning of 2008, through a specially designated holding corporation of Mivtach Shamir and Apax, which indirectly purchased 76% of Tnuva's stock. Thus, Mivtach Shamir indirectly held approximately 20.6% of Tnuva's shares, while Apax held 56% of the shares of the Tnuva Group.
During 2008, the ISA held discussions with Mivtach Shamir, in which it presented its position that since Mivtach Shamir's investment in Tnuva is defined as a ready for sale financial assets, it should be presented in Mivtach Shamir's financial statements at fair value rather than at cost and, as a result, a valuation should be attached thereto. Mivtach Shamir was even required to describe its investment in Tnuva in its periodic reports, as required under the Securities Regulations. As of the first quarter of 2010, the Israel Securities Authority demanded that the financial statements of the holding corporation and of the Tnuva Group be attached as well – since they constitute a significant detail for reasonable investors – taking into account the significance of the Tnuva Group investment in relation to Mivtach Shamir's business as a whole.
As of the first quarter of 2008 until the third quarter of 2011, Mivtach Shamir failed to file its financial statements as required by law, and as of the first quarter of 2010 – failed to attached the statements of the holding corporation and the Tnuva Group, despite the ISA's demands.
As a result of the lack of disclosure, Mivtach Shamir's shares were suspended from trading on the Stock Exchange.
In addition, during this period, the holding corporation, Tnuva Group and Apax, which is the holding corporation's controlling shareholder, failed to meet – according to the ISA's position – their lawful duties by failing to provide Mivtach Shamir with the necessary information and reports so as to enable it to meet its duties as a publicly traded company, even after the ISA demanded that it do so.
An Administrative Enforcement Committee panel approved the enforcement arrangement, stating that when it is clear that the data concerning a private corporation which is related to a public corporation have material consequences for the public corporation, have material consequences for the public corporation, the private corporation needs to know that it is bound by the public corporation's disclosure requirements, as if they were its own.
22 0 Administrative Case 5/12 –Enforcement arrangement between the Chairman of the Israel Securities Authority and Bank Leumi of Israel Ltd. and Leumi Finance Company Ltd.:
On December 12, 2012, an Administrative Enforcement Committee panel approved an enforcement arrangement between the Chairman of the Israel Securities Authority and Bank Leumi of Israel Ltd. (hereinafter, together – the respondents), – the bank) and Leumi Finance Company Ltd. (hereinafter – Leumi Finance)(hereinafter, together – the respondents), a wholly owned subsidiary (100%) of the bank, which was signed on November 12, 2012. Under the arrangement, the respondents confessed to agreed upon facts which record the events that – according to the ISA – constitute the violations included in the arrangement. The respondents did not admit that these actions constitute negligence and that they have committed the violations, but agreed to pay an agreed upon financial sanction and take steps to prevent the violations from recurring.
The enforcement arrangement was signed in lieu of a full administrative enforcement proceeding against the respondents for committing administrative violations of negligently failing to disclose a material detail in a shelf offering report, a violation under Section (4) of Part C of Amendment 7 to the Securities Law and concealing material information from the public during a offering of securities (negligent inducing), under Section 54(a1)(1) of the Securities Law.
Under the enforcement arrangement, a financial sanction of NIS 2 million was imposed on each of the respondents, totaling NIS 4 million. In addition to paying the said financial sanction, the respondents will develop and implement a new effective internal enforcement procedure, which would regulate the handling of previously unpublished material information regarding Bank Leumi's business prior to an offering by Leumi Finance and/or other subsidiaries issuing on behalf of Bank Leumi, prior to the offering. The procedure will regulate the manner in which relevant information is received and discussed, its ramifications in respect to the expected offering and manner of disclosure prior to the offering. The respondents will ensure that the new procedure is actually applied and implemented and assess and update it from time to time so as to ensure its effectiveness.
On November 9, 2011, at 21:33, Leumi Finance published a shelf offering report for two series of deferred linked interest bearing liabilities deeds totaling NIS 2.18 million in value, for Bank Leumi. According to the shelf offering, the institutional tender took place on November 8, 2011 and the time for receiving orders from the public was set for November 10, 2011, between 14:30 and 16:30.
The results of the tender were published by Leumi Finance on November 10, 2011 (Thursday) at 20:39.
Two business days later, on November 14, 2011, at 9:30, the Bank issued an immediate report, which constituted a profit warning, regarding the bank's expected profits for the third quarter of 2011, according to which the expected net profit will be significantly lower than that reported in the first two quarters of the year. According to the report, the decline in net profits was due to the Bank's investment in stocks traded on the Tel Aviv Stock Exchange, "and especially as a result of the cumulative effect of the impairment of its investment in Partner Communications Ltd.'s stock."
22 1 According to the facts of the arrangement, which was signed in October, while Bank Leumi was preparing for its public offering through Leumi Finance, and without any connection between the two, the Bank held discussions regarding impairment of Partner Communications Ltd.'s stocks held by Bank Leumi (through its subsidiary, Leumi Partners), deciding to recognize the impairment in profit and loss rather than, as before, in capital reserve, due to the sharp continuous decline in their value.
The decision had significant implications regarding the Bank's net profit in its financial statements, which were to be published on November 30, 2011.
According to the ISA, the Bank did not conduct an effective, orderly procedure in order to ensure that the offering may go forward in a timely manner, while avoiding information gaps between Bank Leumi, which raises the funds and is responsible for the repayment of debt, and the investing public.
According to the ISA, the result of the evolution of events described in the arrangement is that the Bank acted negligently when it failed to include material information regarding the impairment which affected its profitability in the prospectus (shelf offering report) published by the Bank, through its subsidiary or otherwise, despite the fact that the Bank was in possession of that information. Thus, only two days after the offering, the Bank published an immediate report regarding material information about the impairment affecting its profits.
An Administrative Enforcement panel approved the enforcement arrangement, accepting the ISA's position regarding the materiality of the undisclosed information, and regarding the requirement to uphold a reasonable procedure for the purpose of identifying material information which is unknown to the public at the time of the offering.
In addition, the panel stated that the ISA was right in claiming that the Bank did not conduct a reasonable procedure, which would have been able to identify material information in existence at the date of the offering, which was unknown to Leumi Finance that conducted the offering. The panel emphasized that the structural separation between the Banks, which enjoys the fruits of the offering, cannot result in critical information for the public "falling between the cracks" rather than being available to it.
22 2 XIV Criminal Enforcement Department
1. Criminal indictments
In 2012, following investigations performed by the ISA, four indictments were filed by the Tel Aviv District Attorney's Office (Taxation and Economics Department):58 59
a. In December, an indictment was filed in the Tel Aviv District Court against Yoav Sela on three counts of forging a document with aggravating circumstances under Section 418 of the Penal Code; three counts of use of forged documents under Section 420 of the Penal Code; three counts of obtaining by fraud with aggravating circumstances under Section 415 of the Penal Code; and one count of violating Section 53(a)(2) of the Securities Law, misleading detail in a prospectus.
The defendant was in charge of regulation in Optical Imaging Ltd., which developed a product for early diagnosis of eye diseases. As part of his role, the defendant was in charge of obtaining FDA approval, which is a precondition for distributing and marketing the product both in the United States and Israel. The defendant left the company in November 2009, agreeing to continue handling the FDA approval process.
According to the indictment, the defendant forged a large number of documents with the purpose of misleading and creating a false representation in order to convince the senior officers of the company that he has been able to obtain the approval of the FDA for the product. In addition, in committing these acts of forgery, the defendant caused the company's prospectus drafts and prospectus to include misleading details and caused the company to fraudulently obtain the approval of the ISA to publish the prospectus drafts and prospectus.
b. In December, an indictment was filed in the Tel Aviv District Court against Guy Higashi, on charges of fraudulently influencing the price of securities, violations under Section 54(a)(2) of the Securities Law.
Between December 2010 and May 2011, the defendant made a living from securities trading in order to generate personal gains for himself and members of his family. According to the indictment, during that period, the defendant traded on the Exchange in dozens of different securities of publicly traded companies, in which he made hundreds of coordinated transactions and self dealing transactions between his accounts and his family members' accounts, which were under his control.
In so doing, the defendant created – through self dealing transactions and coordinated transactions – an artificial trading cycle in the securities mentioned in the indictment, thus creating a false representation of ordinary activity in securities between independent parties. In this manner, according to the indictment, the defendant directly influenced the prices of the securities enlisted in the indictment,
58 The number of indictments does not necessarily correspond to the number of investigation cases on which the indictments were based. At times, the District Attorney includes a number of investigation cases in one indictment, or vice versa: it files a number of indictments as part of a single investigation case. One indictment will be filed at the beginning of January 2013. 59 In addition, the District Attorney's Office closed five investigations.
22 3 causing them to increase or prevent them from decreasing, all according to this wishes, thus abusing the trading system.
c. In December an indictment was filed in the Tel Aviv District Court against Amir Bronfeld on charges of fraudulently influencing the price of securities–22 counts under Section 54(a)(2) of the Securities Law; obtaining by fraud – a violation under Section 415 of the Penal Code; fraud and breach of trust in a corporation – a violation under Section 425 of the Penal Code.
The defendant served, from 2006 until April 2010, as head of public offerings in the First International Bank of Israel and Co. – Underwriting and Investments Ltd., and was well versed in capital market trading. As part of his role, the defendant was authorized to perform transactions in the underwriting company's account.
According to the indictment, the defendant performed 22 coordinated transactions between his personal account and the company's underwriting account, abusing his position in the company and his access to the accounts, as well as the company's faith in him to create a false representation as if he were acting in the underwriting account in line with the interests of the underwriting company. Thus, the defendant influenced the price fluctuations of the stocks in which he traded, exposed the public to false trade information and created a false representation of ordinary securities activity.
2. Criminal cases pending in court
As of the end of the year, a number of cases were pending decision in court, as follows:
a. 26 criminal cases were pending in trial court, including 22 indictments filed in previous years.
b. Seven appeals are pending decision in the first appeals instance in the district court.
3. Criminal verdicts in trial court
During the year, 21 verdicts were handed down in trial court:60
a. In January, the District Court (Hon. Judge Rosen) sentenced Abraham Arbivo, Defendant no. 2 in the Orline case, after having being convicted based on his confession, as part of a plea bargain –on charges of money laundering under Section 3(b) of the Money Laundering Law.
The court sentenced the defendant as follows: A six month prison sentence to be served as community service; six months of suspended sentence – for a period of three years – on the condition that the defendant not violate Section 3 of the Money Laundering Law; and a fine of NIS 10,000 substitutable for 100 days in prison. Criminal Case 4218/09.
60The number of verdicts handed down in court does not necessarily correspond to the number of indictments filed, since indictments with more than one defendant sometimes result in separate verdicts, and vice versa –separate indictments are sometimes consolidated into a single case.
22 4 b. In January the District Court (Hon. Judge Kabub) sentenced Shlomo Waldin the Pacifica case, after having being convicted, based on his confession – as part of a plea bargain – on charges of fraud and breach of trust in a corporation and violation of Section 36 of the Securities Law in accordance with Section 53(a)(4) of the Securities Law.
According to the defendant, who served as the Chairman of the board of Pacifica Holdings Ltd., and as manager of its Romanian operations, committed fraud in real estate transactions performed on behalf of the company in various sites.
The court sentenced the defendant as follows: A six month prison sentence to be served as community service; six months of suspended sentence – for a period of three years– the offenses of which he was convicted; the court also required the defendant to sign a commitment of NIS 250,000, whereby he is not to commit the violation of which he was convicted for a period twelve months from the date of the verdict and a fine of NIS 500,000 substitutable for 18 months in prison. Criminal Case 36866–12/09
c. In May, the District Court (Hon. Judge Kabub) sentenced defendants Yossef Antwarg and Yoav Barak in the Pacifica case, after having being convicted – based on their confession, as part of a plea bargain – on a charge of liability of corporate officers for violations committed by their corporation, in violation of Section 53(a)(4) of the Securities Law and Securities Regulations (Periodic and Immediate Reports) in accordance with Section 53(e) of the Securities Law.
The court sentenced the defendants as follows: Yosef Antwarg – a fine of NIS 100,00 and a limit, in accordance with Section 226 of the Companies Law, on serving as a member of the board in publicly traded companies or private companies which have issued bonds to the public as defined under the Companies Law, for a period of two years. Yoav Barak – a fine of NIS 80,000, limit on office as aforesaid, for a period of six months and a suspended prison sentence for a period of nine months. Criminal Case 410–02–11
d. In September, the District Court (Hon. Judge Kabub) convicted Pacifica Ltd. and Jacob Birnbaum, one of the company's shareholders, on charges of reporting with the intent of misleading reasonable investors in accordance with the Securities Law.
The company was convicted for failing to report material information in its possession regarding real estate properties it had purchased in Romania. Birnbaum was convicted of concealing his holdings in company shares, despite the fact that the scope his holdings qualified him as an interested party, requiring him to report this information. Thus, Birnbaum caused periodic and annual reports, as well as reports on share holdings of interested parties in Pacifica to include misleading details. Such details were even published as part of a prospectus filed by Pacifica in March 2007, thus – Birnbaum was also convicted of including a misleading detail in a prospectus.
The court reiterated its former statement, that even when the shareholder's main motif in refraining from reporting his holdings stems from a wish to conceal his holdings for a different reason, this motif cannot void the intent of misleading a reasonable investor.
22 5 e. In November the District Court sentenced Jacob Birnbaum and Pacifica as follows: Birnbaum –one year suspended prison sentence – for a period of two years – on the condition that the defendant not violate any provision of the Securities Law and a fine of NIS 30,000; Pacifica – a fine of NIS 100,000.
Following its conviction, the company petitioned the court to revoke the conviction following a ruling by the Supreme Court in the Israel Ports Case, which allows to refrain from convicting a corporation. The District Court rejected the company's petition, stating that reporting violations under the Securities Law do not allow for refraining from convicting a company. Criminal Case 410–02–11
f. In April The District Court (Hon. Judge Kabub) sentenced Raphael Alon, Adi Shavit, Meir Sabag and Tamam Integrated Recycling Industries Ltd., after they have been convicted–according to their confession, as part of a plea bargain – on reporting violations, for having included misleading details in Tamam's financial statements for 2003–2005, creating a false representation as to the position of the company, so that the reports did not adequately reflect the company's financial position.
The Court sentenced the defendants as follows: Raphael Alon – two months prison sentence to be served as community service, six months suspended sentence and a NIS 300,000 fine. Adi Shavit –a two months sentence to be served as community service, a suspended sentence of six months and a fine of NIS 250,000. Meir Sabag – six months suspended sentence and a fine of NIS 100,000 substitutable for eight months in prison. Tamam – a fine of NIS 500,000. Criminal Case 56619–12–11
g. In April The Magistrate Court (Hon. Judge Barak Nevo) sentenced the defendants Barak Abba Nachmani and the A.B. Equity Investment House Ltd., after having been convicted based on Nachmani's confession, on violating Section 39(b)(1) of the Investment Advice Law.
Nachmani was A.B. Equity's controlling shareholder and held a portfolio management license. He gave orders in A.B. Equity's own account in violation of Section 4(b) of the Investment Advice Law. The court ruled that the purpose of the provisions prohibiting own transactions under Section 4(b) of the Investment Advice Law is to prevent investment portfolio managers from facing conflicts of interest between their fiduciary duty towards their clients and their wish to promote their personal interests, in order to protect clients.
The company sentenced the defendants as follows: Nachmani –suspended sentence of nine months, provided that he not violate the Securities Law or Regulations or the Investment Advice Law, as well as a fine of NIS 250,000. A.B. Equity –a nominal fine of NIS 1. Criminal Case 27036–12–10
h. In April, the District Court (Hon. Judge Kabub) sentenced Ami Gurbetz, after having been convicted–based on his confession, as part of a plea bargain–on counts of forbidden activity by a license holder under Sections 4(a) and 39(b)(1) of the Investment Advice Law, on hundreds of counts of theft by agent under Section 393 of the Penal Law, and on many counts of fraudulently influencing the prices of securities under Section 54(a)(2) of the Securities Law.
The defendant performed recurring transactions in his accounts as well as in investors' accounts: he gave buy and sell orders from his accounts, and at the same
22 6 time gave reverse orders from investors' accounts under his control. Thus, through online continuous trading, the defendant created self dealing transactions which did not reflect actual demand or supply. Such transactions exposed the investing public to fraudulent trading information and affected securities price fluctuations.
The court sentenced the defendant as follows: 27 months in prison less his arrest period, 12 months suspended sentence for a period of three years provided that he not commit any of the violations of which he was convicted and a fine of NIS 150,000 substitutable for 12 months in prison. Criminal Case 29726–12–10
i. In May the Magistrate Court (Hon. Judge Barak Nevo) sentenced Avshalom Weinreb, after he was convicted–based on his confession–of insider information under Section 52d of the Law (See Section p as follows).
The court stated that harming one's occupational prospects does not constitute a vested right sufficient to exonerate the defendant. In this case, the mitigating circumstances regarding sentencing are insufficient to avoid conviction.
The court sentenced Weinreb as follows: community service of 140 hours and suspension of license to market investments for a period of two years, which includes the period in which the defendant voluntarily suspended his license as of the filing of charges against him. Criminal Case 10985–01–11
j. In May the Magistrate Court (Hon. Judge Barak Nevo) sentenced Meidad Dvash – after his being convicted based on his confession, as part of a plea bargain–of two counts of use of information by an insider under Section 52d of the Securities Law. Dvash, who was a fund manager with Migdal Mutual Funds Ltd., made use of insider information given to him by an insider in publicly traded TAT Industries Ltd. The insider information was regarding negotiations to sell the control core of TAT. The use was manifested in selling TAT shares from the fund's accounts, outside the Exchange, to close acquaintances, to which he passed on the information, recommending that they purchase the shares.
The court sentenced him as follows, as agreed in the plea bargain: six months in prison, to be served as community service, a year of suspended sentence for a period of three years and a NIS 600,000 fine substitutable for one year in prison. Criminal Case 27036–12–10
k. In June the District Court (Hon. Judge Kabub) sentenced Defendants no. 2–6 in the Elspec case, after they have been convicted–based on their confession–on various counts of insider information. Elspec develops, manufactures, and markets products for improving the quality of electricity. The insider information revolved around negotiations, and – later on material agreements – with foreign companies to purchase systems produced by the company. Defendant no. 2, Eyal Eden, Head of Engineering at Elspec Engineering Ltd., was convicted of using insider information and conveying insider information to his family members, defendants no. 3, 4, and 5 – Keren, Yaniv and Hava Atia –who were convicted of using insider information obtained through Eden. Defendant no. 6, Nahum Gartner, Head of Procurement at Elspec, was convicted of using insider information, after purchasing Elspec shares, while being in possession of insider information as a result of his role in the company.
22 7 The court detailed the structuring of the sentence following Amendment 113 to the Penal Code regarding methodic use of discretion in penalization, following which it decided to divide the defendants into two groups. The first group includes defendants 2 and 6, senior officers at Elspec. The second group includes defendants 3–5, who are family members of Defendant no. 2. According to the court, it decided to alleviate their sentences due to their extraordinary circumstances.
The court sentenced the defendants as follows: Defendant no. 2, Eyal Eden – six months in prison to be served through community service, two years of suspended prison sentence and a fine of NIS 150,000. Defendant No. 6 –three years of prison to be served as community service, 18 months of suspended prison sentence and a fine of NIS 80,000. Defendents no. 3, 4 and 5 –one year of suspended sentence and a fine of NIS 40,000. Criminal Case 8256–05–11
l. In July The District Court (Hon. Judge Kabub) convicted Elspec VP, Efraim Kadetz of using insider information by purchasing shares while in possession of insider information (regarding the nature of the information, please see Section k above). The court acquitted Kadetz of a count of providing insider information to others.
Regarding the materiality of information, the court stated that the fact that the information was not reported by the company does not indicate that it was immaterial. In addition, the court rejected the defense's position, whereby the prosecution is required to prove materiality through expert opinion. The court stated that the materiality of information received by the Defendant should be assessed in light of additional information that was in his possession, and determined that the combination of information granted the defended undue advantage over other investors.
The court rejected the defense's claims regarding discriminatory enforcement, and determined that the prosecution's discretion in deciding not to prosecute other suspects who performed similar actions in smaller amounts was adequate. The court stated that such cases should be handled by way of the administrative enforcement mechanism.
The court acquitted the Defendant from a count of using insider information by way of delivery and stated that – for the purpose of establishing the elements of the offense – the prosecution is required to point to specific information provided by the Defendant, and that proof that a certain piece of concrete information was provided is insufficient for this purpose. Criminal Case 8256–05–11
m. In July the Magistrate Court (Hon. Judge Shirizly) sentenced Esther Finklestein after she was convicted –following her confession–of 37 counts of using information by an insider, under Section 52c of the Securities Law. The insider information revolved around negotiations for forming a joint venture with a foreign company, for the purpose of marketing and distributing mineral water tanks to homes and offices in Europe.
According to the court, Finklestein took advantage of her position in Mey Eden Ltd. for the purpose of "absorbing" insider information, provided her husband with that information, and purchased with him company stock for NIS 3 million. The Defendant turned a NIS 700,000 profit from the transaction, part of which was realized through the sale of stocks.
22 8 The court sentenced her as follows: six months in prison to be served as community service. Suspended sentence of 16 months for a period of three years, provided the defendant not commit felonies or misdemeanors under the Securities Law, and a fine of NIS 220,000. The parties appealed the sentence. Criminal Case 33927–11–09
n. In July, the Magistrate Court (Hon. Judge Barak Nevo) convicted journalist Adi Ben Israel, of conveying inside information. Ben Israel served as deputy editor of Bizportal (a financial news website), and after erroneously receiving previously unreported information from Bank Leumi's quarterly reports for the second quarter of 2008, he conveyed them to Avshalom Weinreb, a broker for Clal Finance, an investment house (see Section j above). The court determined that information provided by Ben Israel constituted material information, despite the fact that it included only some information from the report, since such data attested to the bank's profitability and each item was material in and of itself. The court rejected the claim that the State is required to file an opinion in order to prove materiality of separate items from the report.
The court determined that due to the utilitarian nature of the relationship between Ben Israel and Weinreb, such information was conveyed by Ben Israel knowing full well that Weinreb would make use of the information. The court drew a distinction between conveying information in this case and in other cases (Helfman and Hadar) and stated that when a conveyor of information is the one to initiate the provision of information, and the purpose of the conversation with the capital market professional is provision of information rather than obtaining advice, the presumption that the capital market professional will make use of the insider information provided to him is given further weight. The court also noted that journalists have much to gain from maintaining a relationship with capital market professionals.
o. In October, the Magistrate Court (Hon. Judge Barak Nevo) handed down its sentence for the defendant Adi Ben Israel, convicted of one count of insider information under Section 52d of the Securities Law.
In rejecting the defendant's petition to revoke the conviction, the court stated that "the fact that the defendant is a journalist constitutes an aggravating circumstance, since he is at a junction of a great deal of information and is expected to make responsible use of it, in order to perform his role as a journalist, in line with the law rather than in violation thereof."
The court stated that public interest should given greater weight, even though no financial harm was incurred by others and it is impossible to identify a specific injured party, but that "the harm, in terms of image and violation of market fairness, hurts the capital market as a whole, and – as a result – the country's economy."
The court sentenced the defendant as follows: 200 hours of community service and a suspended prison sentence of three months for a period of two years, as well as a fine of NIS 5,000. Criminal Case 11–01–10985
p. In September the District Court (Hon. Judge Kabub) sentenced Eran and Amir Dagan as part of a plea bargain. The two were accused of assisting the main defendant, Netanel Sharon, whose case is still pending, to violate Section 39 of the Investment Advice Law. Netanel Sharon, an employee of the First International Bank, was in
22 9 possession of an investment advice license and, as a result, was bound by certain limitations regarding activities in securities. Eran Dagan, a senior high school student at the time of the offense, and his father Amir Dagan, opened a joint securities account to be managed by Netanel Sharon. Amir Dagan made the funds in his account available for this purpose. A month after opening the account, Eran and Amir Dagan withdrew their money from the account and did not continue to share in its profits. Natanel Sharon used the account for a long period of time and made significant profits on account of the Bank's clients. Eran and Amir Dagan were unaware that the account was being used to commit offenses.
The court sentenced the defendants as follows: Eran Dagan–subject to a positive report by a probation officer, shall not be convicted and serve 250 hours of community service. Amir Dagan–a suspended prison sentence and a NIS 60,000 fine. Criminal Case 56618–12–11
q. In September the Tel Aviv Magistrate Court (Hon. Judge Shirizly) convicted Itzhak Belsky on 17 counts of securities fraud under Section 54(a)(2) of the Securities Law and on an offense of obtaining by fraud with aggravating circumstances. In 2001– 2003, Belsky performed dozens of self dealing transactions between his accounts and his girlfriend's bank account, which affected the price of Unidress Investments Ltd.'s stock. The court determined that in 2003, Belsky performed the transactions in order to prevent Unidress from being suspended from trade for failing to meet the Stock Exchange's preservation rules. The court acquitted Belsky of the offense of reporting changes in his holdings, after having determined that his actions were fictitious and resulted in no de facto changes in Belsky's holdings.
The court stated that regarding the term "partner" in Section 1 of the Securities Law, there was no real difference between married whether partners are married or reputed spouses. Criminal Case 1116/09
r. In November the Magistrate Court (Hon. Judge Shirizly) sentenced Itzhak Belsky to six months in jail to be served as community service, a suspended jail sentence and a NIS 400,000 fine.
The court gave significant mitigating weight to the passing of time and to the court's statement that "the attempt to prevent Unidress from being suspended from trading on the Exchange "was done in favor of the company's minority shareholders." Criminal Case 1116/09
s. In October the Magistrate Court convicted Shalom Kuperman of offenses of theft by agent, obtaining by fraud with aggravating circumstances, subornation in connection with an investigation and writing checks without cover.
In 2000-2006 the Defendant received funds from various clients upon presenting himself as an capital market investment manager, and falsely promising them monthly interest rates of 1-2%. Kuperman concealed from his clients that he was in debt, both personally and through his businesses, and convinced them to give him the funds personally rather than as part of a managed investment portfolio. Kuperman's clients, who lacked economic knowledge, were part of the Orthodox community, as he was, and placed their trust in him. Kuperman received from various complainants a total of NIS 5 million, which he used for his own personal needs.
23 0 The court stated that when funds are given along with specific guidelines as to how to use them, then even if they were defined as a loan, the receiver of the funds should be regarded as an "agent" for the purpose of the theft offense, and if he embezzled the funds and used them against the guidelines, he can be convicted for theft by agent. In addition, he who accepts funds and commits to repaying them along with a return – concealing the fact that he is struggling financially and may experience difficulties in meeting his commitments – is committing an offense of obtaining by fraud. Criminal Case 4515/08
t. In December the District Court (Hon. Judge Mudrick) sentenced Yaron Guetta and Alon Sharon, after they were convicted–based on their confession, as part of a plea bargain – for offenses of theft by agent and falsely influencing price fluctuations of securities.
The court stated that Guetta and Sharon took advantage of the trust placed in Guetta by the Bank, as a senior employee charged with one of the bank's largest accounts. In order to carry out their theft plan, the defendants took advantage of capital market trading for personal gain, while manipulating and committing fraud in four different bonds.
The court sentenced the defendants as follows: Yaron Guetta–21 months in prison, a NIS 30,000 fine and 18 months of suspended sentence, provided that he not commit a felony under the Securities Law or under Chapter K of the Penal Code. Alon Sharon – 18 months in prison, a NIS 20,000 fine and 18 months of suspended sentence, provided that he not commit a felony under the Securities Law or under Chapter K of the Penal Code. Criminal Case 9883–07–10
u. In December the District Court (Hon. Judge Kabub) convicted defendants Arye Givoni, David Habi, Tal Yegerman, Rafael Peled, Mashav Refrigeration Ltd. and Feuchtunger Investments on numerous counts in a case widely known as the Peled Givony Case.
The court determined that defendants–Givoni, Habi and Yegerman–stole funds of publicly traded Feuchtunger Industries Ltd. And Mashav Refrigeration Ltd., following the failure of a pretentious, high risk, business move in which they acquired control of these companies as well as of others. The court determined that Peled failed to meet his duties as chairman of the board in these companies when failing to act as required in order preventing the theft. In addition, the defendants and the companies were convicted on reporting offenses as well – for intention to mislead reasonable investors for failing to publish annual reports in order to conceal the withdrawal of funds and the companies' dire positions.
The indictment attributes to Givoni, Habi and Yegerman many counts of theft by an officer for withdrawing funds from the publicly traded companies' accounts and transferring them to their private companies' accounts, in order to repay bank borrowings received for the purpose of creating the group. The Defendants claimed that funneling funds into the private companies was intended to alleviate the banks' pressure on the group, thus benefiting it. The court rejected this claim by the defendants, stating that the pressure applied to the group by the banks resulted from the heavy borrowing which allowed the controlling shareholders to gain their position in the group and that it is not a publicly traded company's role to rescue its controlling shareholders from cash flow difficulties.
23 1 The Court added that controlling shareholders and senior officers of publicly traded companies are responsible, as part of their duties, for company funds, and are authorized to use the funds within a well defined framework. Any deviation from that framework –especially for private purposes and for personal benefits–qualifies as evidence for theft by way of embezzlement.
Regarding the "lack of virtue" component required in order to prove theft, the Court stated that this is a clear cut case where the defendants made cynical use of public companies' funds in order to finance their plan to create a synergic group of construction companies. According to the Court, there was no problem with the defendants' intention to create a successful group of companies, of course, but rather with the manner in which they chose to realize that plan, using any possible means at their disposal, transferring tens of millions of NIS to cover their liabilities – with no trace of proper procedure – with the express intent of excluding shareholders from among the public from either decision making or distributions, which were given solely to controlling shareholders.
Regarding the component of "intention of permanently depriving the other”, the Court determined that the intention of permanently depriving has turned from a regular component to a negative component, with the burden of proving the lack thereof resting on the Defendants' shoulders. The latter must prove, objectively, that they had a reasonable opportunity to return that which they took. The Court emphasized that the intention of permanently depriving is tested at the date of the embezzlement, in other words – even if later on a defendant returns what he has taken, the court should examine whether the taker had a reasonable possibility of returning that which he took at the date in which he took it.
The Court added that as far as it was concerned, where an officer takes assets from a company not knowing, without a doubt, that he would be able to return them even if he had the intention of returning them, an assumption is established whereby he had the intention of permanently depriving the company of said assets. Even in cases where it was proven that the assets which were taken were eventually returned to the public company, which is insufficient to void the offense made at the time that the assets were unlawfully put at risk.
The Court was asked to interpret the term "personal interest", stating that a personal interest may stem from an economic relationship outside the company, between a controlling shareholder and another person, in terms of transactions between the company under his control and another person. The court determined that if the controlling shareholder favors another person either directly or indirectly, this indicates that the controlling shareholder has a material interest in the transaction. However, there may be circumstances where it is sufficient to establish favorability towards another in order to establish the existence of a vested interest for the controlling shareholder. In that case, the strength of the relationship between the controlling shareholder and the other person should be assessed. For example, when a controlling shareholder is enchanted by another person and follows him blindly.
Regarding the term "control", the Court stated that the control test prescribed by the law is a material test which depends on the circumstances of each case, and it may be possible for a shareholder to be considered as having influence on a corporation other than through voting power. The quantitative tests in the
23 2 definition of "control" serve the qualitative test, but the latter not subject to them. According to the verdict, such assumptions, which have become rooted in civil law, also apply to criminal cases, but must be used with utter care.
The Court explained, that as part of the control test, many considerations may be taken into account, including the informal influence of the tested party on a corporation. Informal influence may be manifested in a number of ways: through charisma, which casts a spell on the environment of the tested party and causes the corporation to obey its wishes; or as ties between the tested party and entities which the corporation would like to use to its advantage, for which purpose the corporation is willing to subject itself to the tested party; or through unusual and unique knowledge in the tested party's possession, which the corporation wishes to use for its purposes, thus willing to shape its behavior in accordance with the tested party's requirements. This is not an exhaustive list, but adequately expresses the concept whereby influence on a controlling shareholder may manifest itself in various ways, which change on a case by case basis.
The Court addressed the question of control in multi tiered groups of companies, especially regarding to methods of testing for control – the multiplier method and the controlling shareholder identification method and clarified that the method that best serves the purpose of approval procedures of transactions with controlling shareholders is the method for identifying the controlling shareholder rather than the multiplier method. The Court emphasized that a shareholder may be considered a controlling shareholder even if his control stems from cooperation with another shareholder. Cooperation between parties can develop even without a written agreement, through a verbal or constructive one.
The Court applied the definition of "officer" as prescribed by the Companies Law, and determined that Defendant Yegerman, who was formally identified as an advisor, in fact served as an officer in all of the group's companies. The Court stated that the intention of the Law was that an officer shall not avoid his responsibilities due to formal definitions, or lack thereof, and even parties outside the company – who provide the company with professional services but serve as de facto officers although they were not formally given such titles –are to be identified as company officers.
The Court convicted Peled, who – at the relevant period served as Chairman of the Board of Feuchtunger Industries and Mashav – of fraud and breach of trust in a corporation, harming a corporation's ability to meet its commitments and failure to report with the intention of misleading. The Court rejected the Defendant's claims, according to which he had no knowledge or understanding of the issues discussed, either directly or by implication. The Court determined that the Defendant took it upon himself to serve as Chairman of a group, which conducted itself very aggressively in the capital market; that he represented a group which took control over no less than eight public companies within a very short period of time, borrowing excessively; and that he is in no position to claim that he did not understand what was going on in the group.
The Court was very particular about reporting requirements as a whole and the requirement to publish financial statements in particular. The Court determined that the Israel Securities Authority takes a tough and resolved stance on delinquent filing – and rightly so. In order to postpone the filing of reports, corporations are required
23 3 to ask for extension approvals in advance, which are not easily granted. If it grants an extension, the ISA assesses the company's efforts until the filing deadline and tracks its advances at every stage. In general, there are very few cases in which a corporation is able to prove that it is impossible for it to file the reports in a timely manner, and in any other case, it constitutes a violation of Section 36 of the Companies Law. The Court rejected the Defendants' claims whereby they withheld the filing of the reports due to a dispute with the company's auditors, and in another case that they did so in order to close a deal and for the benefit of the company and its investors. The Court determined that the wish to deny the public information meets the intent criterion required for conviction, and that concealing the opinion of the auditors constitutes misleading reasonable investors to the fullest extent.
Arie Givoni was convicted of 29 counts of theft by an officer under Section 392 of the Penal Code; 32 counts of offenses by managers and employees in a corporation under Section 424 of the Penal Code; 33 counts of fraud and breach of trust in a corporation under Section 425 of Penal Code; and seven counts of reporting under Section 53(a)(4) of the Securities Law.
David Habi was convicted of 29 counts of theft by an officer under Section 392 of the Penal Code; 31 counts of offenses by managers and employees in a corporation under Section 424 of the Penal Code; 31 counts of fraud and breach of trust in a corporation under Section 425 of the Penal Code; and five counts of reporting under Section 53(a)(4) of the Securities Law.
Tal Yegerman was convicted of 30 counts of theft by an officer under Section 392 of the Penal Code; 32 counts of offenses by managers and employees in a corporation under Section 424 of the Penal Code; 34 counts of fraud and breach of trust in a corporation under Section 425 of the Penal Code; five counts of reporting under Section 53(a)(4) of the Securities Law; two counts of forging a document with intent to obtain anything with aggravating circumstances under Section 418 of the Penal Code; and one count of obtaining by fraud under Section 415 of the Penal Code.
Rafi Peled was convicted of three counts of offenses by managers and employees in a corporation under Section 424 of the Penal Code; and five counts of reporting under Section 53(a)(4) of the Securities Law.
Companies Mashav Refrigeration Industries Ltd. and Feuchtunger Investments Ltd. were separately convicted of a reporting violation under section 53(a)(4) of the Securities Law.
The Defendants in this case have yet to be convicted.
4. Verdicts in criminal appeals
a. During the year, the District Court handed down one verdict in a criminal appeal:
In May the Tel Aviv District Court, serving as a criminal appeals court, accepted the appeal of Oren Sarussi and Uri Ben Naftali against the sentence awarded to them after having been convicted of multiple counts of securities fraud. The lower court sentenced them to 20 months of prison, a fine of NIS 45,000 substitutable for four months in prison, a suspended sentence of six months, provided they do not
23 4 commit – for three years since the date of the sentencing – an offense under the Securities Law.
The appellate court gave mitigating weight to the following considerations: the appellants' personal circumstances, punitive differences between them and Herzl Urshalimi (with whom a plea bargain was struck), the passing of time and the accepted punitive level, and alleviated the prison sentence, which was reduced to 14 months. Criminal Appeal 42925–01–12
b. During the year, the Supreme Court handed down one verdict in a criminal appeal:
In November, the Supreme Court , serving as an appellate court, an appeal by Ami Gurvetz on the gravity of his sentence – after he was convicted based on his confession as part of a plea bargain – on offenses of theft by agent, multiple counts of fraudulently influencing the fluctuation of the price of securities and hundreds of counts of prohibited acts by licensee under the Investment Advice Law (please see Section i above).
Although the appeal was rejected, the Supreme Court overrode the decision of the lower court regarding the fine, determining that the fine will lower the chances of the Defendant's victims to receive compensation for their damages. Thus, the Supreme Court decided to revoke the fine and substituted it for damages in the amount of NIS 150,000, to be equally divided between the ten complainants mentioned in the indictment. Criminal Appeal 4666/12
Table 32: Distribution of investigation cases forwarded to the District Attorney's Office in the past five years, by main type of violation* Type of violation No. of cases Securities fraud 3 Insider information 2 Reporting violations 3 Investment advice violations 1 Penal Code violations 3 Total 12
* According to main violation
Table 33: Distribution of indictments in 2012, according to type of offense
Violation No. of indictments Securities fraud 2 Penal Code violations (forgery, 2 impersonating a public servant) Total 4
23 5 As of the end of the reporting year, 17 cases remain in the Securities Department at the Tel Aviv District Attorney's Office (Taxation and Economics), in eight of which the District Attorney has decided to prosecute, but indictments are pending hearing procedures. Nine cases are still pending the District Attorney's decision whether to prosecute or close the cases.
Table 34: Cases at the District Attorney's office as of the end of 2012 pending decision whether to prosecute, by year forwarded* Year No. of cases 2007 1 2009 2 2010 2 2011 2 2012 10 Total 17
*Or a decision was made but a hearing is yet to be held.
Table 35: Cases at the District Attorney's office as of the end of 2012 pending decision whether to prosecute, by type of violation* Violation No. of cases Securities fraud 5 Misleading detail / reports 8 Insider information 1 Penal 2 Investment Advice 1 Total 17
*Or a decision was made but a hearing is yet to be held.
23 6 APPENDICES
23 7 2012 Budget Implementation Report (in NIS thousands)
Section Section title Approved budget Updated 2012 budget no. for 2012 budget for 2012 implementation GENERAL: Total expenditure 175,920 175,920 160,477 SALARIES: Total 90,490 90,490 85,711 [216] [216] [216] 1001 Salaries of ISA employees 70,180 69,840 67,911 1002 Provision for pensions & severance 10,310 10,310 9,621 1003 Overtime 6,330 6,330 4,487 1004 Temporary workers 500 500 334 [30] [30] [30] 1005 Legal interns and students 2,140 2,480 2,446 1006 Chairman's salary 810 810 774 1008 Expenses of ISA employees 220 220 139 RELATED EXPENSES: Total 8,790 9,270 8,466 Training & continuing education 2001 program 1,010 1,390 1,345 2002 Vehicle maintenance 2,000 2,100 2,095 2003 Car rentals 100 100 21 Traveling & living expenses in 2004 Israel, moving expenses 5,580 5,580 4,917 2005 Loan fund 100 100 88 MAINTENANCE: Total 20,700 21,250 20,976 3001 Organizational expenses 1,200 1,610 1,500 3002 Office supplies 700 840 775 3003 Building maintenance & repairs 17,500 17,500 17,491 3004 Mail & telephone 1,050 1,050 1,048 3005 Equipment, machinery & furniture 250 250 161 PROFESSIONAL ACTIVITY: Total 13,480 11,970 10,505 Licensing of investment advisors & 4002 portfolio 3,200 3,050 2,988 4004 Legal expenses 600 750 651
23 8 Section Section title Approved budget Updated 2012 budget no. for 2012 budget for 2012 implementation 4005 Professional library 550 550 421 4006 Participation in int’l conferences 300 300 242 4007 IFRS (participation) 1,200 1,200 1,100 Auditing of corporations, mutual 4008 funds & advisors 4,100 2,830 2,824 4010 Investor education 150 150 18 4011 Counseling services to the ISA 950 710 439 4012 Seminars 400 400 279 4015 Academic research fund 700 700 471 4016 Foreign relations 550 550 476 4017 Internal auditing 230 230 216 Preparation of financial 4018 statements 550 550 381 IT: Total 13,000 11,280 10,376 5003 Computer maintenance 11,250 10,050 9,192 5004 Purchase of digitized information 1,750 1,230 1,184 DEVELOPMENT BUDGET: Total 22,500 24,700 24,443 Information systems (hardware & 6001 software) 17,000 19,100 18,916 6002 Purchase of vehicles* – – (46) 6003 Buildings renovation 5,500 5,600 5,573 RESERVES: Total 6,960 6,960 – 7005 Salary reserves 5,000 5,000 – 7006 Inflation reserves 830 830 – 7010 General reserves 1,130 1,130 – INCOME: Total (estimate)** (137,000) (137,000) (125,505) 9001 Prospectus fees (49,000) (49,000) (38,342) 9002 Annual fees (67,000) (67,000) (62,042) 9003 Net financing income (13,000) (13,000) (17,845) 9004 Investment advisors licensing fees (8,000) (8,000) (7,275)
* Proceeds from one vehicle from Vehicle Administration. ** In accordance with the decision of the Knesset Finance Committee, a temporary order was issued, according to which the ISA is to reduce the annual fees payable by corporations and individuals supervised by the ISA over the next five years, as follows: 40 percent per year for the first two years, 30 percent for the next two years and 20 percent for the fifth year. Thus, in 2012, all fees were reduced by 40 percent.
23 9 Approved Budget for 2013 (in NIS thousands)
Section no. Section title Approved Budget for 2013 GENERAL: Total expenditure 178,730 SALARIES: Total 95,940 [224] 1001 Salaries of ISA employees 75,950 1002 Provision for pensions & severance 10,640 1003 Overtime 5,200 1004 Temporary workers 500 [32] 1005 Legal interns and students 2,630 1006 Chairman's salary 820 1008 Expenses of ISA employees 200 RELATED EXPENSES: Total 9,520 Training & continuing education 2001 program 1,250 2002 Vehicle maintenance 2,140 2003 Car rentals 100 Traveling & living expenses in Israel, 2004 moving expenses 5,930 2005 Loan fund 100 MAINTENANCE: Total 21,330 3001 Organizational expenses 1,300 3002 Office supplies 730 3003 Building maintenance & repairs 18,000 3004 Mail & telephone 1,050 3005 Equipment, machinery & furniture 250 PROFESSIONAL ACTIVITY: Total 11,480 Licensing of investment advisors & 4002 portfolio 2,900 4004 Legal expenses 750
24 0 Section no. Section title Approved Budget for 2013 4005 Professional library 450 Combined with 4006 Participation in int’l conferences 2001 4007 IFRS (participation) 1,200 Auditing of corporations, mutual 4008 funds & advisors 2,800 4010 Investor education 400 4011 Counseling services to the ISA 750 4012 Seminars 400 4015 Academic research fund 700 4016 Foreign relations 420 4017 Internal auditing 230 4018 Preparation of financial statements 480 IT: Total 13,300 5003 Computer maintenance 11,500 Purchase of computerized 5004 information 1,800 DEVELOPMENT BUDGET: Total 22,600 6001 IT (hardware & software) 17,600 6003 Buildings renovation 5,000 RESERVES: Total 4,560 7005 Salary reserves 2,600 7006 Inflation reserves 830 7010 General reserves 1,130 REVENUES: Total (estimate)* (132,300) 9001 Prospectus fees (35,300) 9002 Annual fees (71,000) 9003 Net financing income (12,500) 9004 Investment advisors licensing fees (13,500)
* In accordance with the decision of the Knesset Finance Committee, a temporary order was issued, according to which the ISA is to reduce the annual fees payable by corporations and individuals supervised by the ISA over the next five years, as follows: 40 percent per year for the first two years, 30 percent for the next two years and 20 percent for the fifth year. Thus, in 2013, fees will be reduced by 30 percent for reporting corporations (including dual listed corporations), fund managers and the Stock Exchange, and fees payable by licensees. Underwriters and information distributors will be reduced by 40%.
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