ISRAEL SECURITIES AUTHORITY Annual Report 2016 *The following text contains only selected chapters from the ISA annual report (2016). The translation is intended solely for the convenience of the reader, the ISA does not assume any responsibility whatsoever as to its accuracy and is not bound by its contents. For the original full Hebrew text click here. ר ש ו ת נ י י ר ו ת ע ר ך ISRAEL SECURITIES AUTHORITY יושב ראש CHAIRMAN May 10, 2017 / 14 Iyar, 5777 MK Moshe Kahlon MK Moshe Gafni Minister of Finance Chair of the Finance Committee Ministry of Finance Knesset Dear Minister, Dear MK and Committee Chair, Re: Report on the Israel Securities Authority’s Activities In accordance with Section 14 of the Securities Law, 5728-1968, I respectfully submit to you this report on the activities of the Israel Securities Authority (hereinafter, “the ISA”) in the year 2016. In recent years, the world has undergone rapid change, and the world in which regulated entities operate is also constantly changing. Financing options are becoming more diverse, and competition with the world’s major securities exchanges and other financial sources is becoming fiercer. At the same time, yet for different reasons, negative sentiment in financial markets and the TASE has emerged. This negative sentiment deters entrepreneurs from raising capital on the TASE, which consequently compounds liquidity and pricing concerns. As the number of stock issues diminishes, the demand for debt issues, which is also related to the low interest environment, is on the rise. In such an environment, investors’ risk appetite increases, and financial products change form. As a result of all these developments, we are required to supervise activities that were completely unknown just a decade ago. These and other challenges that the market poses call for innovative, “outside the box” thinking on our part. Our duty today is not only to protect investors, remove barriers, and correct market inefficiencies. In view of the fact that the TASE and the capital market are currently failing to realize their enormous potential to benefit the public and the economy, it is our obligation to develop and shape the market, in order to lead it to a position in which it can manifest its full potential. Actions that stimulate the capital market have enormous significance for the public and the economy because the capital market and the TASE are as an important economic resource that contributes to economic growth and employment, smaller government deficit, increased investment and savings opportunities available to the public, greater competition, and a lower cost of living. 1 ר ש ו ת נ י י ר ו ת ע ר ך ISRAEL SECURITIES AUTHORITY יושב ראש CHAIRMAN In a well-functioning capital market and securities exchange, investors and entrepreneurs meet to finance economic activity and to diversify savings and investment vehicles. Among other things, the market can encourage institutional investors to channel the public’s funds that they hold into finance projects that spur employment and growth, for the benefit of the economy, investors, savers, and the public at large. Instead, in the absence of an adequate offering of investment options, 230 billion shekels of the public’s funds are diverted to finance business activities in the United States and Europe (almost ten times more than a decade ago) rather than in Israel. This is especially disconcerting in view of the fact that technology firms also prefer to finance their operations overseas and occasionally relocate their operations overseas almost entirety. This creates a long-term loss for the economy: Not only does country loose in terms of employment and growth, it also loses the potential for foreign companies to establish their economic operations in Israel and reinforce their ties to Israel. Of all the activities that the ISA promoted in 2016, I would like to emphasize the structural change in the TASE. This recently approved change is a foundational event in the life of the TASE and the capital market, one that will allow the TASE to become more competitive, less expensive, and more efficient, on par with the world’s most advanced and modern securities exchanges, and will also facilitate cooperation with other securities exchanges, which is critical for the further development of the TASE. But these steps are not sufficient in themselves. The structural reform of the TASE is an extremely important and necessary step, but it is not sufficient. I share the vision of the Minister of Finance, who wishes to lead a comprehensive reform of the TASE and the capital market that includes creating attractive conditions for entrepreneurs, for the benefit of the economy. Such conditions include regulatory relief for technology companies and for new issuances that were recently completed; relief for small and medium sized companies including a waiver of the requirement to file quarterly statements; registration of foreign securities on the TASE; a reduction in fees for IPOs, and many other types of relief. In 2016, the ISA operated in four main areas of activity, with the aim of facilitating the operations of supervised entities and reducing regulatory costs, and pursuing uncompromising enforcement of the law against offenders: Companies: The ISA promoted exemptions for companies performing their first issuances; legislation to encourage R&D firms and reporting exemptions; and relief measures for mutual funds and ETFs, portfolio managers, as well as other measures. Investors: The ISA launched an Electronic Voting system, promoted legislation to allow the operation of foreign mutual funds in Israel, completed the regulation of trader platforms, completed legislation regulating the activities of credit rating companies, completed legislation to improve financial statement reporting, regulated the operations of REIT funds, and other activities. 2 ר ש ו ת נ י י ר ו ת ע ר ך ISRAEL SECURITIES AUTHORITY יושב ראש CHAIRMAN The Tel Aviv Stock Exchange: The ISA promoted various reforms including a structural reform in the TASE, and reforms in cross-listing and finality of settlement. Enforcement: The ISA initiated and handled significant investigation cases, continued to handle cases that were initiated in previous years, took enforcement action against unsupervised investments, and conducted other enforcement activities. In this year, several important cases of the State Attorney Securities Department were concluded with success. In direct continuation of the ISA’s activities in 2016, we intend to expand activities in the following areas in 2017: Companies: We intend to expand our work on the graded regulatory scheme to allow greater flexibility in capital and debt raising, and to ensure that effective enforcement deters criminal activity without paralyzing the economic activities of firms. We intend to complete legislation that will allow for crowdfunding and peer- to-peer lending. Furthermore, the ISA also intends to promote legislation for establishing an entity that oversees the work of accountants (an Israeli PCAOB). Investors: We intend to increase the available range of investment vehicles, take action to reduce investors’ fees, facilitate online services and other web-based initiatives. We also hope to promote investment vehicles that offer tax benefits in line with “investment provident funds,” and explore the issue of social impact bonds. The Stock Exchange: We intend to study the implications of creating a list of small-scale listed companies that will operate under reduced regulatory supervision; take action to enhance the TASE’s efficiency and to create an appropriate foundation that facilitates cooperation between the TASE and other securities exchanges worldwide. Enforcement: In addition to attention to the important cases that are being prosecuted as part of our uncompromising enforcement policy against offenders, we intend to target unlicensed FOREX platforms and eliminate all activities involving binary options in Israel. On the matter of administrative proceedings, I would like to note that the policy of the ISA is to encourage enforcement arrangements in the early stages of a legal proceeding for the sake of enforcement effectiveness and efficiency. Furthermore, in view of the decline in the number of IPOs and the low trading volume on the TASE, which adversely affect the liquidity and efficiency of the capital market, the ISA believes that it is important to promote several steps to reinstate the TASE as the primary vehicle of financing for business in Israel. The main steps recommended by the ISA include: 3 ר ש ו ת נ י י ר ו ת ע ר ך ISRAEL SECURITIES AUTHORITY יושב ראש CHAIRMAN “Ceasefire” – An agreement among regulators, under the auspices of the Ministry of Finance and the Ministry of Justice, to cease all efforts to enact new more stringent regulations in order to create regulatory certainty. The frequent regulatory changes since the 2008 crisis have caused many companies to eschew the capital market. The most damaging outcome is an environment of regulatory uncertainty, which undercuts companies’ efforts to plan future activities. The ISA proposes that all financial regulators reach an agreement to suspend all work on new stringent regulations for a period of five years (excluding special circumstances), in the hope that regulators in other areas will join the agreement. Tax relief to encourage the public to prefer investments in the capital market over financial investments in real estate – The ISA proposes a tax relief strategy, in