Report on the Activities of the Israel Securities Authority

Report on the Activities of the Israel Securities

Authority

For 2011

Table of Contents

I Functions of the ISA II The ISA and its Employees III ISA Departments IV Research, Development and Economic and Strategic Counseling Department 1. Strategic counseling 2. Economic counseling 3. Committee on Increasing Competitiveness in the Economy 4. The materiality requirement for restatements 5. Cooperation with the Milken Institute and the Koret Foundation 6. Competitive procedure for conducting research with the Department of Research, Development and Economic and Strategic Counseling 7. Research cooperation between the ISA and academic institutions 8. Supervision over the secondary market and Stock Exchange V. Corporate Finance Department A. General B. Supervision 1. Public Reporting – data and highlights (a) Prospectuses and capital raising (b) Reporting requirements (c) Financial reporting and valuations 1. Review of financial statements 2. Valuations (d) Transactions with a controlling shareholder (e) Private offerings (f) Purchase offers (g) Bond settlement agreements and bond trustees 2. Reports filed with the ISA and requests for exemptions/extensions (a) Termination of reporting requirements (b) Exemption applications (c) Extension applications

3. Audits and outsourcing in the Corporate Finance Department 4. Underwriter registry 5. Dual listing C. Regulation – staff position papers and special projects in 2011 1. Staff and Plenum position papers and FAQs 2. Requests for pre-ruling 3. Accounting and auditing enforcement decisions (a) Decisions on accounting issues (b) Decisions on auditing issues 4. Special projects in 2011 (a) The Reporting Improvement Project (b) Underwriting (c) Corporate Governance – Amendments 16 and 17 to the Companies Law (d) ATM (e) Revocation of Regulation 51(b) (f) Supervision over Independent Auditors (PCAOB) (g) Handling the crisis (h) Public shells D. Enforcement 1. Financial sanctions VI 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. Reports e. Fund manager participation 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 b. Prospectuses c. Trustees d. Reports e. Enhancement of ongoing disclosure and development of audit mechanisms f. Audits of ETN Managers g. Regulatory model h. Pre-rulings 3. Investment advisors, investment marketing agents and investment portfolio managers a. General b. Licensing c. Supervision d. Regulation activities e. Enforcement activities concerning license holders 4. Legislation Activity Involving the Department a. Primary Legislation b. Subsidiary Legislation 5. Judicial proceedings involving the ISA VII Department of Supervision over the Secondary Market 1. The Department’s purview 2. Regulation activities VIII Legal Counsel Department 1. Legal Counsel – responsibilities 2. Key activities in 2011 3. Agenda for the coming Year 4. 2011 highlights a. Coordinating and supporting civil suits b. Funding of class and derivative actions and removal of barriers to private enforcement c. Tenders and contracts d. Public inquiries e. Report by the Freedom of Information Officer

f. Contact details IX Legislation Department a. General b. Special projects in 2011 c. Primary and secondary legislation published in the reporting year d. Proposed primary and secondary legislation e. Private and government bills pertaining to ISA operations f. Directives X Criminal Enforcement Department 1. Criminal indictments 2. Criminal cases pending in court 3. Criminal Verdicts in Trial Court 4. Verdicts in criminal appeals XI Investigations and Intelligence Department XII International Affairs Department 1. General 2. Participation in international forums 3. Financial Sector Assessment Program (FSAP ) 4. Bi-lateral recognition 5. Signing agreements for cooperation on information exchange 6. Study delegations 7. Cooperation on enforcement and exchange of information 8. Regulation of custodians 9. Activity as part of the Committee for Implementing the Prohibition on Investing in Corporations Dealing with Iran Law XII Information Systems 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 Investigations and Intelligence Department 7. Forms and payments system 8. BI irregular trading system

9. Knowledge management – search tools 10. Knowledge management – organizational portal 11. Human resources system 12. Integrated voting system 13. Infrastructure: servers, communications, and information security

Appendixes Appendix 1: 2011 Budget Implementation Report Appendix 2: Approved Budget for 2012

Tables Table 1: No. of applications for permits to publish prospectuses vs. permits granted in 2010-2011 Table 2: Issues and offerings by way of shares, convertible securities and bonds in 2010-2011 Table 3: Shelf Prospectus Reports in 2010-2011 Table 4: Initiated review of financial statements in 2008-2011 Table 5: No. of transactions with controlling shareholders in 2010-2011 Table 6: Private offerings (substantial and exceptional) in 2010-2011 Table 7: Purchase offers in 2010-2011 Table 8: Companies which ended their reporting requirements in 2010-2011 Table 9: Exemption applications filed in 2010-2011 Table 10: Extension applications filed in 2009-2011 Table 11: Underwriter registry in 2010-2011 Table 12: Requests for pre-ruling in 2010-2011 Table 13: Financial sanctions imposed in 2010-2011 Table 14: No. of mutual funds and value of assets under their management in 2007- 2011 Table 15: Statistical data regarding mutual funds, by classification, for 2011 Table 16: Participation rate of mutual fund managers in general meetings in which they are required by law to participate and vote in 2007-2011 Table 17: Violations for which fines were imposed in 2011 and fine amounts Table 18: Total no. of licenses granted to individuals – portfolio managers, investment advisors and investment marketing agents in 2006-2011 Table 19: No. of license applicants added each year in 2006-2011

Table 20: Exam success rates in 2011 Table 21: Violations for which fines were imposed and fine amounts Table 22: Violations for which fines were imposed in 2011, for which notifications were sent in 2012, and fine amounts Table 23: Violations for which financial sanctions were imposed in 2011 and fine amounts Table 24: Quantitative data on primary legislation, by year Table 25: Quantitative data on secondary legislation by year Table 26: Cases forwarded to the Department of Investigations and Intelligence in the past five years, by type of violation Table 27: Administrative probes transferred to the Investigations and Intelligence Department, by type of violation Table 28: 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 29: Distribution of investigation cases forwarded to the District Attorney's Office in the past five years, by main type of violation Table 30: MAGNA activity data for 2011

Charts Chart 1: Funds classified according to percentage of funds’ asset value Chart 2: No. of Trust Funds in 2007-2011 Chart 3: Asset Value of trust funds in 2007-2011Chart 4: No. of ETN series in 2007- 2011 Chart 5: Value of Public Holdings of ETNs in 2007-2011 Chart 6: No. of reports filed by ETN managers in 2008-2011 Chart 7: Total value of assets under management by portfolio management companies in 2006-2011 Chart 8: Licensing examinees (by no. of exam units) in 2006-2011 Chart 9: Processing of exemption applications in 2006-2011Chart 10: Processing of internship applications in 2006-2011 Chart 11: IMF comparison between the ISA and leading regulators around the world

April 15, 2012

To: To: Dr. Yuval Steinitz, MK Mr. Moshe Gafni, 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 2011. 2011 emerged a year which dispelled the sense of euphoria that characterized capital markets both in Israel and abroad – following the temporary recovery from the global financial crisis which struck the markets in 2008 and the economic crisis which currently threatens Europe, the US and other countries. It seems that in 2011, investors internalized the fact that the financial crisis was still going on, and fear increased that additional publically traded companies in the Israeli capital market may be unable to meet their commitments to repay bonds they have issued to the public. In a period of crisis such as this, the Israel Securities Authority is required to exercise caution and dedicate time and human resources so as to provide maximum protection to investors. For this purpose, the ISA took actions so as to increase disclosure to investors, strengthen the position of current gatekeepers, and ensure that trust in the capital markets be preserved. The ISA's basic assumption – which is supported by international institutions such as the International Monetary Fund and economic literature – is that adequate, high- quality regulation contributes to the stability of capital markets, which should serve as a significant vehicle for economic growth. In addition to effective supervision, the Israel Securities Authority intends – in the upcoming year – to enhance regulatory certainty, to avoid the use of creative accounting whose purpose is to improperly create "distributable surplus", to strengthen the position of bond holders in debt settlement agreements, to enable all investors to vote online, to regulate the activity of trading platforms, to abridge financial statements, to regulate supervision over independent auditors, as well as to strengthen corporate governance at the Tel Aviv Stock Exchange. In addition, the ISA began to prepare for regulating entities hitherto unregulated by legislation, such as rating agencies, proxy advisors, and broker dealers. These are expected to come under the ISA's supervision, which would ensure that their activity is carried out while the interests of investors remain protected. In 2011, the ISA began developing and implementing an active, strict supervision and enforcement strategy for the purpose of protecting the investing public. It does so while thoroughly examining the burden of regulation and the costs incurred by

reporting capital market entities (in terms of time, financial resources and human resources). In 2012, the ISA intends to implement cost/benefit regulation models, with the purpose of striking a balance between the need to fully protect significant capital market interests and the need to prevent regulatory overburdening for reporting entities. One of the regulatory cost/benefit model applications currently examined by the ISA is to create a regulatory scale, i.e. – define different regulatory regimes for large and small corporations. 2012 is expected to be highly challenging for the ISA. The projects which the ISA intends to promote this year are of supreme significance for ensuring the proper function of the capital market in Israel. The ISA’s activities will be derived from a general strategy which is based on four key principles:

 Balance: Balancing of the regulatory burden placed on reporting entities while reinforcing “market supervision” and “market discipline” mechanisms.  Proportionality: Supervising and regulating while taking into account cost/benefit considerations, i.e – examining the cost of regulation for reporting entities in terms of time, money and human resources vs. benefits to the investing public.  Transparency: Increasing regulatory certainty and transparency of the ISA’s activity, as well as involving the public in legislative processes.  Enforcement: Embedding adequate norms and self controls in the capital market, which would create deterrence as regards violation of the law and increase the public’s faith in the capital market. Scope of activity – data Corporations – as of December 31, 2011, 687 corporations were traded on the Tel Aviv Stock Exchange, 535 of which were companies traded in Israel alone, 63 were bond companies (i.e. – companies which have only issued bonds to the public), 45 dually-listed companies, and 29 financial instrument companies. In 2011, the business sector in Israel raised NIS 3,988 million in shares, warrants and convertible bonds, NIS 2,997 million of which were raised locally, as compared with NIS 8,476 million raised in 2010. This year, the business sector raised NIS 31,979 million through the issue of bonds (excluding convertible bonds), as compared with NIS 38,228 million in the previous year. Furthermore, the business sector raised NIS approximately NIS 935 million through the exercise of warrants, as compared with approximately NIS 950 million in the previous year. Mutual funds – The number of active mutual funds reached 1,261 in 2011 (as compared with 1,247 mutual funds as of the end of 2010), managed by 22 fund managers. The value of assets under management of mutual funds as of the end of 2011 reached NIS 142.3 billion, as compared with NIS 156.6 billion as of the end of 2010. The reduction in the value of assets stems mainly from excess redemptions in the mutual funds sector.

Exchange Traded Notes (ETNs) – at the beginning of 2011, seven groups of issuers were active in the Exchange Traded Notes (ETN) market, some of which included a number of companies each. During 2011, a consolidation process in the field began. As of today, five groups of companies issuing ETNs are active, following the consolidation of the Tachlit Group with the Index Group, and the consolidation of the Meitav Group with the Mabat Group. As of year's end, the number of ETN series stood at 459, as compared with 437 ETN series as of the end of 2010. Public holdings in ETNs at the end of the reporting year were valued at NIS 56.8 billion, as compared with NIS 57.7 billion as of the end of 2010, a decrease of approximately 1.6% (approximately NIS 1 billion). The decrease in the value of public holdings was the result of a fall in market prices of the series’ underlying assets, despite positive accumulation during 2011 (approximately NIS 5.4 billion). Investment advisors and portfolio managers – as of the end of 2011, there are 5,302 registered licensees in this field, 995 of whom are portfolio managers, 3,698 investment advisors, and 609 investment marketers. Furthermore, there were 181 licensed firms, of which 144 were investment portfolio management firms, 11 investment advice firms, and 26 investment marketing firms. The value of assets under management by licensed portfolio managing firms as of the end of 2011 reached NIS 232 million, the same as the value of assets managed by these companies as of the end of 2010. Special projects and key activities

1. Improved Financial Reporting Project

During 2010, the Israel Securities Authority launched an extensive project to improve reporting by corporations, so as to increase the relevance of the disclosure procedure, rendering it more useful to the investing public for the purpose of making investment decisions. The key principles of the project were published for public comment during 2011, and in 2012, the ISA staff intends to publish a proposed amendment to the Securities Regulations which reflects all the aspects of the project. For this purpose, the ISA’s staff met with various market players, including representatives of institutional entities, lawyers, underwriters, CPAs and analysts. These meetings yielded that, in general, the market’s view is that the "description of a company's business" is positive and undoubtedly represents a significant improvement as compared with the period prior to the implementation of the Barnea Report. Nevertheless, it seems that the current disclosure provisions and their application are deficient. The main problem seems to be excess, immaterial information included in the statements, as well as lack of uniformity and clarity in the application of disclosure requirements and a lack of sufficient business disclosure from management’s point of view. The Project includes, inter alia, modification of the reports’ format so that each chapter contains disclosure requirements with similar or identical purpose; setting industry-specific disclosure requirements; clarification of the principles of materiality and reporting from management’s point of view; as well as determining extensive disclosure provisions for aspects of corporate governance.

2. Underwriting In the past few years, security offerings have been made mostly without underwriters’ commitment or due diligence by underwriters. As a result, such offerings are conducted without an underwriter being responsible for possible misleading details in prospectuses. On the other hand, during this time, the significance of gatekeepers outside corporations has become all the more evident. When an offering of securities to the public is made, this becomes doubly important, since – being party to the transaction – corporations are motivated to paint a bright picture of their position. Underwriters have served as external auditors of the quality of discovery in prospectuses around the world as well as in Israel – in the past. Since the situation in Israel has changed in the past few years, the ISA’s staff published, at the end of 2011, an extensive paper addressing the manner in which underwriters should be included, once again, in public offerings and other types of offerings. During the upcoming year, the ISA intends to initiate legislation that would regulate the issue. 3. Supervision over 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 according to which these auditors are paid by audited entities, 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. The flaws inherent in the independent auditor model, as well as the supreme significance of this profession, highlight the extreme significance of establishing such an independent statutory, non-for-profit body in Israel. This body would supervise, on an ongoing basis, accounting firms auditing reporting companies, and will be charged with the audit process conducted by its members, setting auditing standards and principles as regards quality control and independency, as well as improving the audit process on an ongoing basis The establishment of such a body, which would match similar bodies currently in existence in developed countries, also serves as a key condition to the ongoing development of the local capital market and encouragement of foreign investments. In 2011, the Corporate Finance Department conducted a thorough examination of this issue in a number of countries, in order to promote a legislative amendment on this issue in the upcoming year. 4. Handling the bond crisis In 2011, 30 debt settlement agreements were reached, valued at NIS 5.7 billion, as compared with 20 debt settlement agreements valued at approximately NIS 2 billion in 2010, and 38 debt settlement agreement valued at NIS 11 billion in 2009, at the height of the crisis. The Israel Securities Authority invests considerable resources in handling the debt settlement agreement phenomenon, and has developed – throughout the year – a “regulatory toolbox” intended to improve the protection granted to investors in times of crisis. This toolbox was derived from the ISA’s systemic view, and the

tools contained therein may be divided into four main levels: the corporate disclosure level; the internal process level (on the part of companies), and the external processes (implemented by gatekeepers); the institutional activistic level; and the ISA’s activistic level. As part of the ongoing handling of settlement agreements, the ISA examines disclosure provided by companies within settlement agreements and prior to them, as well as the need for publishing a prospectus as part of a settlement agreement in order to secure the interests of prospective offerees. As part of settlement agreements conducted 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 the class meeting is conducted and the disclosure provided to the holders of securities. This is done in order to protect the interests of the investing public. In the upcoming year, the ISA intends to enhance its activity in response to the current liquidity crisis in world financial markets and examine the need to develop further tools in order to deal with risks – both by early identification of risk sources in corporations and by developing tools which would enable optimal disclosure for securities holders for the purpose of pricing their investments in corporations during this time. In addition, the ISA will examine tools which would enable bond holders to better negotiate their interests when companies are in distress. 5. At the Market Offerings – ATMs In 2011, ISA staff examined the possibility of implementing a public offering mechanism in use in the United States, which is entitled At the Market Offering (ATM). This type of offering enables corporations to sell securities – whether these have been purchased on the secondary market or are issued for the first time – during the regular course of trading at the stock exchange, thus saving on offering costs. A preliminary paper on the issue was published for public comment, and the possibility of promoting a legislative amendment thereof will be examined in 2012. Enforcement General The ISA is responsible for taking enforcement action in all operating segments under its purview, 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 IT systems. In addition, the ISA conducts additional intelligence activities in order to support, corroborate or refute this information, ensuring the secrecy of the process.

Criminal Enforcement In 2011, the ISA’s Investigations and Intelligence Department identified and investigated a number of securities trading incidents in institutional entities, in which senior officers and employers allegedly engaged in fraudulent activity. In addition, the Department located and investigated events in which individuals connected to controlling shareholders of publically traded companies engaged in activities suspected as securities fraud. During the reporting year, the ISA forwarded to the District Attorney’s office nine cases after investigating them. In addition, as part of the ISA's strategy of involvement in the globalization process, in 2011 the Department responded to foreign authorities’ judicial inquiries requests in accordance with treaties signed by the ISA. In addition, cooperation between the ISA’s Investigations and Intelligence Department and other enforcement agencies continued to increase, as well as cooperation with Israeli enforcement agencies as part of their joint efforts to defeat economic criminal activity. In 2011, the Securities Department at the Tel Aviv District Attorney's Office (Taxation and Economics) filed eight indictments based on investigation files forwarded by the ISA, on charges of using insider information, fraudulently influencing securities prices, and various reporting charges. Administrative enforcement 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 included six members was established. The committee includes two panels of three members each. The chairmen of both panels are retired judges appointed by the ISA, and the other four members of the committee are lawyers and capital market professionals appointed by the Minister of Justice. The committee exercises enforcement procedures due to administrative violations of the Securities Law of 1968, the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law of 1995 (hereinafter – the Advice Law), and the Joint Investment Trust Law of 1994. In addition, the committee will discuss license revocation or suspension due to reliability faults under the Advice Law. Administrative procedures against violators are initiated following approval by the Chairman of the ISA. As a result, an administrative proceeding system was established at the ISA, which is responsible for preparing administrative claims based on administrative probes and managing the cases for the ISA in front of the administrative enforcement committee. In 2012, the ISA began implementing administrative enforcement, following a decision by the committee to approve an enforcement arrangement as regards the Mivtach Shamir firm and the Apex Tnuva Group. This arrangement demonstrated the ISA’s intention to implement the administrative enforcement tools granted to it in a proportional and balanced manner, which was also manifested in the committee’s decision that the financial sanction agreed upon in the enforcement arrangement was

13 indeed reasonable and proportionate, but was not adequately severe, given the identity of the violators and gravity of their violations.

The global context Financial Sector Assessment Program (FSAP) In November 2011, a delegation of the International Monetary Fund (hereinafter – the IMF) arrived in Israel in order to conduct an assessment of the financial sector in Israel (FSAP). The latter is an extensive procedure which assesses the stability of the financial sector and quality of supervision thereof, as well as whether the existing infrastructure enables it to function properly – all in light of international standards. This assessment procedure was conducted by a delegation of experts specializing in capital markets, banking, insurance, payment systems, clearing, etc. The delegation visited Israel for a period of two and half weeks, during which its members met with numerous senior government officials, including the Minister of Finance, the Governor of the Bank of Israel, the Chairman of the Israel Securities Authority, the Capital Markets Supervisor and the Supervisor of Banks, as well as with a representatives of a number of institutions and privately held entities in each sector. The assessment of the Israel Securities Authority was conducted by representatives of the International Monetary Fund, in accordance with a methodology developed by the International Organization of Securities Commissions (hereinafter – the IOSCO), which includes a set of 38 principles that serve as a comparative scale to the desirable modus operandi of a securities regulator. The Israel Securities Authority was fully assessed for meeting 29 principles (one was excluded from the survey). It was also assessed, without being graded, in relation to the eight remaining principles lately adopted by the IOSCO, in terms of the ISA's readiness to adopt these principles. The principles according to which the Israel Securities Authority was assessed include, inter alia, enforcement standards, supervision over the secondary market, supervision of intermediaries, supervision of issuers, supervision of mutual funds and cooperation. The final report of the International Monetary Fund was published in April 2012, and its findings show that – internationally speaking – the ISA’s functioning and level of regulation it exercises places it in line with the world’s foremost securities commissions. A comparison between the Israel Securities Authority’s evaluation and those of leading securities commissions worldwide yields that Israel scored the highest number of “fully implemented” principles. Bi-lateral recognition In 2011, the European Securities and Markets Authority (ESMA) decided to recognize the Israeli regulation regarding the content and format of a prospectus in accordance with the Securities Law. The significance of this decision is that an Israeli prospectus, with the addition of several details, may be filed in all 27 EU countries, for the purpose of listing publically traded Israeli companies on European stock exchanges. The recognition of Israeli regulation is a precedent in the European Union. It is the first time that the ESMA has exploited the newly acquired power granted to European regulators under the European Prospectus Directive and Transparency Directive to recognize regulation regimes outside Europe as equivalent. The decision to recognize Israel represents a positive indication regarding the nature and quality of the Israeli regulation.

Additional goals of the ISA for 2012 Online voting system The Israel Securities Authority attaches great importance to increasing activism on the part of shareholders and bondholders from amongst the public. Such activism can be expressed, inter alia, through participation in meetings and involvement in decision making processes which shareholders and bondholders may participate in. In effect, the rate of participation in meetings from among the public is minute, and it seems that the reason for this is the amount of time consumed by actual arrival to a meeting, which does not always justify the benefit that investors see in participating in shareholder or bondholder meetings. Thus, the Israel Securities Authority decided to lower 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 system is intended for all holders of securities, including institutional investors who are obligated to participate in meetings. The technological development process is nearing its final stages. In 2012, the ISA intends to promote legislative amendments which would enable this system to be activated. Regulating brokers and dealers Investment intermediaries – investment advisors, portfolio managers, mutual fund managers, ETN managers, analysts, rating agencies, brokers and dealers are important to the proper functioning of the capital market. The significance of intermediaries stems from their liaising between the public and the capital market. Since the public’s trust is crucial to capital markets, the reliability of investment intermediaries is essential to the stability of the financial system. As of today, most intermediaries are subject to regulation – whether directly or indirectly. However, some types of intermediaries and activities are not regulated by law. Performing transactions for others (brokerage), performing transactions for others with an intermediary’s own account (dealer) and providing custody services for clients’ assets and clients’ cash – these services are currently unregulated in terms of providing adequate protection to clients using the services of intermediaries and placing their trust in them.

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. The provisions of the law will obligate intermediaries to register or obtain licenses, and their activity will be regulated and supervised by the ISA. In addition, rules and binding provisions will be set regarding the relationship between those intermediaries and their clients, the duties of trust and care and duties to uphold the interests of clients.

Beginning of supervision over trading platforms During 2012, regulations that would grant the Israel Securities Authority the power to supervise alternative trading platforms, which have never been supervised, are expected to be approved. The activity of these platforms has exposed investors to disclosure risks, stability risks and other risks. The ISA’s supervision over this area is

15 essential to protecting the investing public, and the ISA intends to be highly active in this area, establishing a new licensing, regulation, supervision and enforcement system. New supervision regime for Exchange Traded Notes In the past year, the ISA published underlying principles for a new supervision model over Exchange Traded Notes (ETNs). 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 key principles of the supervision model are:

 Moving onto a regulated regime – regulating the ETN sector under the Joint Investment Trust Law. This constitutes a move from a disclosure regime to a supervision and regulation regime, applying the principles of mutual funds' corporate governance and strengthening the position and responsibility of trustees.  Market risks – models were defined for measurement and management of market risks, including the VaR model and extreme scenarios.  Investment and credit risk principles – establishing principles regarding the types of investments that ETN firms would be permitted to make, the limits on entities in which they may invest and other aspects of internal supervision over such investments.  Liquidity – a number of limits have been set regarding non-liquid backing assets, including the revaluation of assets according to their value upon immediate withdrawal.  Allocation of risk capital model – the model establishes the allocation of capital required for operational risk, market risk, and credit risk, in order to neutralize economic incentives to create exposures, and – on the other hand – encourage solid behavior among ETN issuers. These principles shall be regulated in legislation as part of the process of regulating the activity of the ETN sector, through early adoption of most principles in the ongoing activity in ETNs. Abridging of financial statements For some time, the ISA has had the intention of handling the issue of the growing length of financial statements, which may impair investors’ ease of use and render their understanding and investment decision making more difficult. Thus, the ISA decided to initiate a process – which would include supervised entities and the public – to examine ways in which to abridge the scope and reduce the complexity of details included in financial statements. As an initial step, the ISA issued a call to capital market players to propose ideas and possible solutions to abridge the financial statements. The ISA intends to conduct a symposium on this issue later in the year in order to examine how to reach this goal. Tests and conditions for dividend distribution According to the Companies’ Law, a corporation may distribute dividends if two requirements are met: The first is an accounting test, which examines whether a company has distributable profits, while the second is a material-economic test which

16 examines whether a distribution would impair the company’s solvency. A distribution which does not meet the accounting test requires court approval. The purpose of the accounting surplus test is to enable a company which has a sufficient cushion, or which has been profitable for the past two years, to approve a distribution of dividend using a relatively simple procedure, without involving the court, provided that the board of directors has taken responsibility for the company's meeting the solvency test. Nevertheless, it should be noted that the Companies Law was enacted in 2000, in an accounting environment that was radically different than that 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 foresee when enacting the Companies Law. One of the main questions is whether a company’s revaluation profits, which are based on valuations, qualify as distributable profits. Yet this is not the only question. A number of companies have lately reported their intention to adopt IFRS 9 early, enabling them to redesignate financial assets which have accumulated losses and were charged to net income – to other comprehensive income. Such a move raises the question of whether when applying the accounting surplus test for the purpose of dividend distribution, losses derecognized from the net income line item following the adoption of IFRS 9 should be taken into account. In order to remove any doubt on the matter and create the legal certainty necessary for the capital market to function properly, the ISA approached the Ministry of Justice at the beginning of the year, requesting a speedy procedure for passing regulations under the Companies Law, which would include in the accounting surplus test losses derecognized as a result of implementing IFRS 9. This solution does not, of course, exclude the need for a comprehensive arrangement of proper distribution rules for the long term, which would take into account changes that have occurred in accounting since the enactment of the Companies Law. Rather, it serves as a temporary solution to a specific problem which stems from the provisions of IFRS 9. In addition to this specific solution, the ISA intends to examine, with the Ministry of Justice, a comprehensive solution to the dividend distribution issue later in the year. Regulatory scale and applying cost/benefit models One of the ISA’s main goals in the upcoming year is to examine cost/benefit models in regulation. This goal is in line with the ISA’s view of its role of regulator as one which warrants striking an ongoing balance between the need to fully protect significant capital market interests and the need to refrain from overburdening supervised entities with regulation requirements. One of the possible applications in a cost/benefit regulatory model is to create a regulatory scale. In other words – to create different regulatory regimes for large corporations as compared with small corporations. This is a complex issues with considerable pros and cons. On the one hand, the ISA is aware of small corporations’ difficulties in fulfilling all requirements imposed on them by law, since these demand significant time, money and human resources in relation to the resources available to them and may be detrimental in terms of efficient resource allocation through the capital market. On the other hand, the fear is that compliance with regulation by small corporations is often lacking, and reducing the requirements imposed on these

17 corporations may result in compromising the interests of investors. Thus, the right balance needs to be found. One recent example of a varied application of regulation is the ISA’s legislative initiative as regards corporate governance in portfolio management firms. This initiative included a distinction between large and small portfolio managers, and applied extended corporate governance rules only to large portfolio management firms. In addition to assessing alternatives for varied regulation, the ISA intends to examine possible steps for mitigating regulation requirements, provided these result in no harm to the investing public. As part of the aforementioned, the ISA conducts meetings with supervised entities and firms representing them, in order to find out about regulatory overburdening and enable them to propose alternative models for striking a balance and creating proportionality in regulation. After receiving feedback from the market and players, the ISA intends to examine and implement models for examining cost/benefit in regulation, while creating some exemptions for supervised entities in order to achieve regulatory balance and proportionality without compromising the interests of investors.

Respectfully,

Prof. Shmuel Hauser

I Functions of the ISA

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. Current immediate reports, quarterly and annual financial statements; b. Reports regarding transactions between a company and a controlling shareholder therein; c. Reports on private offerings by companies; d. Purchase offer specifications; e. Mutual funds' current reports; 3. Regulating and supervising the activities of the mutual fund sector; 4. Licensing portfolio managers, investment advisors and investment marketers, regulating their activity and supervising them; 5. Ensuring the compliance of portfolio managers and non-banking members of the 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 Advice Law), and violations of other laws where related to violations of the aforesaid laws. 8. 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; one of them is an employee of the Bank of Israel. The ISA employs accountants, lawyers, economists and administrative employees.

II The ISA and its Employees

As of the end of December 2011, the members of the ISA plenum were as follows – Prof. Shmuel Hauser, Chairman; Mr. Yaheli Cahanov, Adv.; Mr. Haj Ihie Hani, CPA; Dr. Eti Einhorn; Dr. Lea Paserman-Josefov; Dr. Keren Bar Hava; Ms. Oranit Kravitz, Adv.; Mr. Eldar Duchan. Mr. Eyal Epstein; Mr. Barry Topf.

The ISA Plenum usually meets once a month. The ISA Plenum also deals, through the ISA’s committees, with granting applications for permission to publish prospectuses; granting exemptions and extensions; stock exchange issues; issues relating to the ISA’s finances and budget; the 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 2011, the ISA Plenum held 16 meetings; the Disclosure and Reporting Committee held 51 meetings; the Secondary Market Committee held six meetings; the Fines and Financial Sanctions Committee held three meetings regarding class actions, five meetings regarding civil fines under the Regulation of Investment Advice and Investment Portfolio Management Law of 1995 (hereinafter – the Investment Advice Law), and two meetings regarding the imposition of civil fines under Section 114 of the Joint Investment Trust Law; the Supervision and Regulation Committee held seven meetings regarding the granting of licenses and permits under the Joint Investment Trust Law and the Investment Advice Law; the Finance Committee held three meetings; the Audit Committee held five meetings; the Tender Committee held 40 meetings.

As of the end of December 2011, the members of the ISA plenum were as follows – Chief Legal Counsel; - Amir Wasserman, Adv.1

Senior advisor to the chairman; - Moti Yamin, Adv.2

Head of the International Affairs Department; - Ms. Yael Almog, Adv. Head of the Investigations and Intelligence - Mr. Nir Bar-On, Adv. Department; Head of Administrative Enforcement; - Dr. Ilana Modai, Adv. Secretary General; - Mr. Oded Shpirer, Adv. Head of the Securities Department at the Tel Aviv - Ms. Orli Doron, Adv. District Attorney's Office (Taxation and Economics); Head of the Research, Development and - Dr. Gitit Gur-Gershgoren Economic and Strategic Counseling Department; Head of the Information Systems Department; - Mr. Natan Hershkovitz Head of the Corporate Finance Department; - Ms. Shirel Guttman-Amira, Adv. Head of the Investment Department; - Mr. Dudu Lavi Director of the Investor Education Unit and ISA - Ms. Sharona Mazalian- Levi3 Spokesperson; Head of the Department of Supervision over the - Mr. Ronen Madar, CPA Secondary Market; Head of the Legislation Department. - Ms. Daniele Rimon, Adv.

At the end of December 2011, a total of 216.65 positions were staffed, as follows: Chairman’s Office - 4 positions; Legal Counsel - 5 positions; Legislation - 4 positions; Department of International Affairs - 4 positions;

1 On September 25, 2011, Adv. Amir Wasserman was appointed as the ISA's Chief Legal Counsel, in lieu of Adv. Shoni Albeck.

2 On June 1, 2011, Adv. Moti Yamin was appointed as Chief Advisor to the Chairman of the ISA, in lieu of Adv. Yael Almog. 3 On November 1, 2011, Ms. Sharona Mazalian-Levi was appointed as the ISA Spokesperson, in lieu of Mr. Ori Katzir.

Corporate Finance Department - 43.5 positions; Investment Department - 38.66 positions; Securities Department at the Tel Aviv District - 14 positions; Attorney's Office4 Administrative Enforcement - 4 positions; Investigations and Intelligence Department - 35.33 positions; Research, Development and Economic and - 5 positions; Strategic Counseling Department Information Systems Department - 7 positions; Department of Supervision over the Secondary - 10 positions; Market Secretarial, Administrative, Finance and Human - 18.16 positions; Resources Interns - 9 positions; Students - 15 positions;

The approved manpower quota as of the end of December 2011 stood at 227 positions. The portion of men and women at the ISA, as of December 2011, is equal. The percentage of academics at the ISA is approximately 90% of the employees, who are mostly 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 Trust 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.

4 The approved positions include lawyers who are employed by the ISA for the purpose of assisting the office of District Attorney in carrying out its roles in matters relating to the Israel Securities Authority. For this purpose, the ISA employs 14 lawyers and five interns. 22

III ISA Departments Research, Development and Economic and Strategic Counseling Department The Department’s role is to extend economic counseling to the Chairman of the ISA and to the Organization’s various departments, on matters which are economic in nature. The Department takes part, on a regular basis, in staff discussions and recommendations subjected to the approval of the Stock Exchange Committee and in various tasks of ISA work teams dealing with various subjects, including proper trading in the Stock Exchange, the Stock Exchange Rules & Regulations, new financial instruments, the ISA budget, etc. Corporate Finance Department The staff of the Corporate Finance Department, which includes accountants and attorneys, is responsible for the real time monitoring of current reports issued by reporting entities, including immediate reports, as well as interim and annual financial statements. Monitoring includes the review and examination of reports with an emphasis on: level of disclosure; compliance with the provisions of the Securities Law and Regulations; enforcement of GAAP; and examination of the legal, accounting, and economic aspects involved therein. The Department’s staff is charged with handling complex, often interrelated, legal and accounting issues and with identifying market failures that require the ISA’s intervention. Special effort is dedicated – in cooperation with the Investigations and Intelligence Department - to preventative activity based on intelligence. Investment Department The Investment Department is in charge of the 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’s headquarters include, inter alia, the Department’s legal counsel, as well as five functional units, as follows: 1. Licensing Division; 2. Supervision of Mutual Funds Division; 3. Supervision of Licensees Division; 4. Financial Instruments Division; 5. Audit Division. Department of Supervision over the Secondary Market The Department coordinates the ISA’s supervision and control over the proper and fair management of the Tel Aviv Stock Exchange (hereinafter – the Stock Exchange). The Department’s authority stems from the provisions of the Securities Law, focusing on the provisions of Chapter H of the Law, which deals with the ISA’s

23 supervision powers regarding the setting of 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. Legal Counsel Department Legal Counsel at the ISA is charged with all legal facets of the ISA’s activity and is headed by the Chief Legal Counsel. The Department’s attorneys are teamed up with the ISA’s various departments, closely assisting in the ISA’s ongoing designated activities and drafting legislation and subsidiary legislation proposals. The Department’s attorneys review prospectuses and reports issued by companies and mutual funds, and handle various aspects of immediate reports in accordance with the Conflict of Interest Regulations, Private Offerings Regulations and Purchase Offers Regulations. Other ISA attorneys take part in supervising and regulating the activity of the Stock Exchange as well as in supervising and regulating the activity of investment advisors and investment portfolio managers. The attorneys also take part in the advisory procedures that government authorities conduct with the ISA in areas where such a procedure is required by law. In addition, Legal Counsel handles all matters related to the ISA’s work, authority and general matters (such as contracts, tenders, etc.). It also provides litigation services, representing the ISA in court on certain issues and assisting in civil proceedings handled by the State Attorney or other bodies where the ISA is a party. Legislation Department The Department’s role is to provide a response to the many and varied legislative needs which form part of the ISA's purview. The Department makes an effort to create up-to-date regulation which is aligned with standards accepted worldwide and is based on the principles of balance and proportionality, emphasizing the importance of deterrence and enhancing discipline in the market, while taking into account cost considerations in the sense of time, money and manpower vs. public good. A balanced, proportional regulation – according to the ISA – should be developed, inter alia, through a dialogue with the public and supervised entities. The Department leads and promotes regulation that deals with the ISA’s activity, and is in charge of formulating any and all legislation (laws and regulations) initiated by the ISA. Investigations and Intelligence Department The Investigations and Intelligence Department is charged with identifying and exposing criminal activity in the capital market, in order to prevent it, as far as possible, or to take enforcement action, mainly by initiating investigation procedures to examine suspicions for prima facie criminal offenses in the capital market. 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, during the past year, the Investigations and Intelligence Department started to conduct administrational probes as part of the administrational enforcement procedures.

The Department includes staff with investigative background – mainly lawyers and accountants by profession. Department of International Affairs 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 – integrating 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 bodies and securities authorities, including signing memoranda of understanding for cooperation with those authorities. Administrative Enforcement Department The Administrative Enforcement Department was established in 2011 for the purpose of implementing the new administrative proceeding system, in the same year, as part of the Streamlining ISA Enforcement Procedures Law (Amendment) of 2011. The Department will represent 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 will manage and accompany the administrative procedures throughout, beginning with the decision to conduct an administrative probe and until the proceeding has been exhausted. After the Administrative Enforcement Committee approved the legal procedures for its work and published those on the ISA website on November 30, 2011, the administrative enforcement mechanism – as determined by law – went into effect. Administrative proceedings are conducted as follows: after an administrative probe and/or criminal investigation is conducted and it is decided to convert it into an administrative proceeding - the probe/investigation material is transferred to the Administrative Enforcement Unit, which examines the case and decides whether to initiate an administrative enforcement proceeding. If it indeed decides to initiate such a proceeding, the Department sorts through the material in each case in order to choose that which is most relevant to examining the violation, and develops it into an administrative pleading, by which it will conduct the proceeding, as an “administrative prosecutor” in front of the Administrative Committee. The abovementioned law grants the Chairman of the ISA the power to engage in enforcement arrangements with violators. As part of its role, the Enforcement Department will be responsible for making recommendations to the Chairman of the ISA regarding enforcement arrangements, their development with violators and submitting the agreed-upon arrangements to the approval of the Administrative Enforcement Committee. In addition, the Administrative Enforcement Committee may, according to the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law of 1995 (hereinafter – the Advice Law) to revoke or suspend an individual’s license (as well as the license of a company associated with that individual) due to a credibility fault. The Administrative Enforcement Department shall conduct such proceedings against license holders, in front of an ISA committee.

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 Investment Trust Law of 1994 as well as Chapter G1 of the Advice Law. The staff of the Administrative Enforcement Department take part in developing legislation in the field of enforcement in various economic enforcement forums, 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. 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. As part of this role, he is responsible for the following key issues: managing the ISA’s accounting and comptroller units, including financial reporting for the ISA; managing the accounting function; managing the fee collection system; preparing the annual budget proposal; handling the budget approval proceedings 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 the manpower quota and recruitment; salaries; employment agreements and terms; career development for employees; professional training; and employees’ welfare; managing of the procurement as well as professional and operational engagements and managing the ISA’s tenders; managing material resources (construction, maintenance, vehicles); and the area of security and safety. Information Systems Department The roles of the Department include the development and maintenance of the ISA’s data systems and computing and communications infrastructures, so as to enable the ISA’s management and staff to perform their duties according to the approved annual work plans. The Department takes part in setting forth the ISA’s computing strategy and implements it. In some cases, the Department responds to requests by other departments, and in others – it takes action in accordance with its knowledge of the needs of the various departments. The Department identifies their needs and initiates projects which provide a computerized response thereto. The Department is responsible for developing and maintaining the following IT systems: he 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, including data regarding corporations, mutual funds, investment advisors and portfolio managers, trading data, trading supervision, detecting trading irregularities (while developing an

26 interface for input received from the Stock Exchange); data used for economic research and accounting; ERP for the controller unit and additional dedicated systems. The Department also handles hardware and software infrastructure: purchase and maintenance of personal computers and relevant off-the-shelf software; purchase and maintenance of servers; internal communications network and external communication lines, including lines to Internet providers and a line connecting the Jerusalem and Tel Aviv offices, which allows full sharing of information between the two sites; information security for all systems; telephone communications, telephone lines and switchboards; maintenance and servicing of printers; supply and installation of consumables of all kinds, etc. Some of the Department’s activities are conducted using outsourcing agents, which are supervised by the Departments staff. Securities Department at the Tel Aviv District Attorney's Office The Department Office, 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 in order to battle money laundering and white collar criminal activity and establish sanctions and behavior norms in this field through tax laws and other relevant legislation. With the development of the capital market and the lack of adequate enforcement to protect the investing public, the purview of the Department was extended, and it was decided that it alone would handle this area under the Securities Law and other relevant laws, both directly and indirectly. The Department specializes in handling large, complex and multi-document cases.

IV Research, Development and Economic and Strategic Counseling Department 1. Strategic counseling The Department of Research, Development and Economic and Strategic Counseling offers strategic counseling and direction to the ISA’s Chairman and various departments. The Department monitors economic developments and trends in capital markets in Israel and abroad on an ongoing basis. It gathers and analyzes economic data and information, so as to ensure that the ISA’s strategic policies are in accordance with the developments, changes and risks which arise in international capital markets. 2. Economic counseling During the reporting year, the Department offered economic counseling on various current issues The Department extended assistance the Corporate Finance Department, the Investment Unit, the Investigations and Intelligence Department as well as the Attorney General in matters related to trading on the Stock Exchange and the manner in which capital markets operate. It also assisted the International Affairs Department in updating information for international organizations. In addition, the Department cooperates with the Department of Supervision over the Secondary Market on issues related to the control and supervision of trading. During the reporting year, the Economic Department led several work teams and participated in others: The ISA Enforcement Forum, the ISA Financial Intermediaries Team, the ISA Team for Developing a Capital Adequacy Model for Own Account Trading Platforms, the ISA Team for Systemic Risk and the ISA Knowledge Management Team. 3. Committee on Increasing Competitiveness in the Economy The Team for Examining the Current Holding Structure in Business Groups was established in order to examine the current holding structure in publically traded companies in Israel and their possible ramifications in three different areas – investors’ good, the level of competitiveness in the Israeli market, and market stability. The team examined the ramifications of the current holding structure for investors, i.e. – whether the existing holding structure have a negative influence on returns and whether it increases risk exposure for private investors. In addition, the team examined whether multi market contacts are created and their influence on the level of competitiveness in the Israeli market as a whole. As part of its work in the team, the Department conducted research and was in charge of gathering information which later formed the basis for ISA’s position in the Committee and the Committee’s recommendations. The latter were published in 2012, and the ISA currently takes part in a team responsible for implementing the recommendations as legislation.

4. The materiality requirement for restatements During the past decades, restatements in financial statements have undergone various changes both in Israel and abroad. These changes were influenced by more extensive changes in accounting, such as the enactment and implementation of the Sarbanes Oxley Act in the United States and later, the implementation of the International Financial Reporting Standards (IFRS) in Israel. As part of the effort to improve the disclosure procedure, the requirements for reporting restatements in financial statements have been made more strict, both in terms of the Sarbanes Oxley Act and as expressed in the Israel Securities Authority’s Decision 99-4 regarding materiality. Research conducted in the United States shows that one of the main changes which occurred following the changes in reporting and control requirements was the issue of a great number of reports regarding restatements and corrections in financial statements. In addition, research which examined market reaction to restatements, both before and after the enactment of the Sarbanes Oxley Act, suggests that the stricter requirements have done more harm than good, since the reporting explosion caused a significant decrease in market reaction to announcements published by publically traded companies, i.e. – indifference on the part of the investing public. Such changes reemphasized the need for reevaluation of the level of materiality required in order to carry out a misstatement in financial statements. The Department examined this subject so as to present and describe the main trends in restatements, as well as examine various materiality thresholds determined by quantitative criteria, while conducting sensitivity analysis for various materiality thresholds in terms of their influence on equity and profit. 5. Cooperation with the Milken Institute and the Koret Foundation The Department established an initiative in cooperation with the Koret Fund Fellows Program at the Milken Institute. The Foundation offers research programs, in which it awards grants to outstanding students graduating from institutes of higher education. As part of the program, research fellows serve as interns in government ministries and parliamentary bureaus, where they receive guidance from internationally renowned experts. As part of the program, research fellows serve as interns in government ministries and parliamentary bureaus, where they receive guidance from internationally renowned experts. The Department provides the research fellows with counseling, guidance and assistance, and the Foundation monitors their work. Research conducted during the reporting year: a. Study on the Mutual Fund Industry The study focuses on the influences of the new disclosure requirements regarding classification and the creation of numerous additional, more focused categories on the mutual fund industry. The study examines whether, as a

29 result of this process, monies have been transferred from general mutual funds to specialized mutual funds and whether – as a result of introducing more specialized products – that has had an influence on the advice process turning from investment advice to a process akin to investment management. The following are additional research questions which were examined in the study:  Do fund managers create a greater number of mutual funds in order to increase their chance of receiving better investment grades from rating agencies?  Do the funds change the name of funds in order to "erase" a history of low returns? b. Concentrated ownership and voting by related institutional entities The requirement for institutional entities to vote in shareholder meetings brought about the establishment of consulting firms which conduct an analysis of the decisions under discussion and issue an opinion thereof for institutional entities, in return for a fee. Examination of this market shows a structure in which one firm dominates most proxy consulting services. In continuation to the study conducted by the Department regarding the structure of the proxy industry and its influence on institutional entities’ involvement in votes, which was conducted in 2010, in 2011 the Department conducted a study regarding voting by institutional entities and the connection between their manner of voting and these entities’ relationship to business groups and pyramids. Many institutional entities are held by business groups, a fact which may create conflicts of interests between planholders in those institutional entities and the personal and business interests of their principal shareholders: - Controlling groups may use the voting rights of institutional shareholders under their control in order to bring forth the approval of management decisions in related companies (usually control relationships). - Business relations between institutional entities and/or their controlling group and publically traded companies may influence the manner of voting in such companies. - Cooperation between business groups may influence the manner of voting by institutional entities’ under the groups' control. As part of the study, a grading variant of corporate governance was defined, which is based on results of voting in general meetings: The grades will take into account the percentage of motions not approved in the vote (or passed by nearly a third) and the companies’ ability to pass motions (even with recommendation to vote nay). In addition, the study will examine whether there is a difference in the measure between companies which form part of controlling groups and “independent” companies.

c. Study regarding the relationship between ownership structure and regulation The study focuses on the relationship between the level of protection awarded to investors in legislation and the structure of ownership. The study surveys the relevant literature and conducts a quantitative analysis of the influence of a specific legislative amendment passed in Israel which prevented public offerings of two classes of shares and the influence of this change on ownership structure. 6. Competitive procedure for conducting research in cooperation with the Department of Research, Development and Economic and Strategic Counseling In order to extend the ISA research basis, the Department established a competitive procedure for the purpose of recruiting researchers from academia for joint studies. Eligible candidates include 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. These subjects include: The development of the capital market; correcting economic and regulatory failures; increasing investors’ trust and increasing public awareness of capital market issues. Upon completion of the procedure, the ISA shall engage, through the Department, with up to four researchers, each of whom shall conduct a study in cooperation with the ISA and under its guidance. In order to recruit researchers, the ISA issued a call for conducting economic studies which invites eligible candidates to offer their candidacy. The selection of candidates takes place in three stages, which include: (1) Examining whether the candidates meet the threshold requirements; (2) Grading the candidates on a qualitative basis in accordance with the predetermined criteria; (3) Conducting an exam in order to determine the candidates’ written expression capabilities as well as their familiarity with the capital market and knowledge thereof; (4) Conducting personal interviews. Program fellows will receive research scholarships for conducting their studies, in accordance with predetermined milestones. The candidate selection procedure is due to be completed in 2012. 7. Research cooperation between the ISA and academic institutions The Department operated a program for joint research, whose aim is to expand the ISA’s research groundwork by enlisting academic researchers for joint research work. Participants in the program include master students and PhD candidates studying economics, business administration, and law in higher

education institutes. Program candidates are to submit research proposals on subjects related to the ISA’s areas of activity and goals. These subjects include: The development of the capital market; correcting economic and regulatory failures; increasing investors’ trust and increasing public awareness of capital market issues. Researchers whose proposals are accepted by the ISA shall conduct their research in full cooperation with the Economic Department and receive financial support. 8. Supervision over the secondary market and Stock Exchange During the reporting year, the Department cooperated with the Supervision of Secondary Market Department regarding various issues related to the supervision of the secondary market and the Stock Exchange. As part of this cooperation, the Department took part in meetings of the Stock Exchange’s board of directors, prepared material for meeting of the ISA’s Secondary Market Committee and handled additional ongoing issues common to the ISA and the Exchange.

V 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 includes 687 reporting traded corporations, of which 535 are traded in Israel alone, 63 are bond companies, 45 dual listed companies, 29 financial instruments, 15 channels (banks and insurers). In addition, the Department is in charge of a few dozen delisted companies. As one of the executive arms of the Israel Securities Authority (hereinafter – the ISA), 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. The Department employs accountants, lawyers, and economists, the majority of whom serve as points of contact for reporting companies. All 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. 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: Examining the disclosure and accounting treatment in financial statements of reporting corporations (which are selected for review in accordance with a risk model); examining prospectuses and approving their issue; examining reports, particularly reports regarding transactions (mergers, transactions with controlling shareholders, purchase offers, settlement agreements); conducting in-depth audits in companies (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 development of the financial market, in which it is highly active, such as the Underwriting Reform, Amendments 16 and 17 to the Companies Law, and recommendations of the Centralization Committee, among others. In terms of enforcement, the Department is mainly focused on imposing financial sanctions on reporting corporations or controlling shareholders therein who have violated the provisions of the Securities Law. Currently, after the administrative enforcement proceedings have gone into effect, the Department is expected to be involved in various stages of administrative proceedings filed against reporting corporations.

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 determined each year and prioritized according to the ISA’s work plan for the reviewing of 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 comments on the draft prospectuses and requests for clarifications arising from the reviews are addressed to candidate offerors by a question letter, so as to render the review more efficient and ensure its uniformity (both for material reasons and for the purpose of efficient time management). During 2011, 115 applications for permits to publish prospectuses were reviewed under full or partial procedures and 44 applications – under the brief review procedure.5 Table 1: No. of applications for permits to publish prospectuses vs. permits granted in 2010- 20116 No. of shelf No. of No. of IPOs out prospectuses No. of permits Year applications of total no. of out of total granted submitted permits granted no. of permits granted 2010 221 161 28 (17%) 111 (69%) 2011 159 137 17 (12%) 93 (68%)

Data regarding capital raising and offerings in 2010-20117 In 2011, the business sector raised approximately NIS 3,988 million in stocks, stock options, and convertible bonds, NIS 2,997 million of which were raised locally. This

5 Relates to prospectuses filed on the basis of the 2010 annual financial reports up to prospectuses filed on the basis of the Q3/2011 financial reports.

6 Data relates to prospectuses filed and prospectuses which have been approved between January 31 and February 1.

7. Capital raising data in this chapter were taken from Security Exchange reports. 34

as compared with NIS 8,652 million in the previous year, NIS 8,476 million of which were raised locally. This year, the business sector raised approximately NIS 31,979 million through the issue of bonds (excluding convertible bonds), as compared with approximately NIS 38,228 million in the previous year. Furthermore, the business sector raised approximately NIS 935 million through the exercise of warrants,8 as compared with approximately NIS 950 million in the previous year.

8 Including the exercise of warrants by subsidiaries.

Table 2: Table 2: Issues and offerings by way of shares, convertible securities and bonds in 2010-20119 (NIS millions, in current prices) 2010 2011

Shares, warrants and convertible bonds:

a. Public offerings

Local shares and warrants 7,421 2,946 Local convertible bonds 1,055 51 Foreign issues 176 991 b. Private offerings

Local shares and warrants 3,744 1,490 Local convertible bonds 11 12 Foreign issues 393 501 c. Exercise of warrants

Stock options10 329 562 Participation unit options11 293 50 Convertible bond options 13 7 Total shares, warrants and convertible bonds 13,435 6,610

Bonds:

a. Public offerings

Corporate bonds 37,406 31,342 Structured bonds 752 0 Certificates of deposit 70 637 b. Private offerings12

Corporate bonds 1,226 2,581 TACT institutional bonds 2,996 5,306 Bonds of unlisted companies 223 437

9 Excluding index products. 10 NIS 75.7 million of which by subsidiaries in 2010; NIS 109 million of which by subsidiaries in 2011. 11 NIS 12.4 million of which by subsidiaries in 2010. 12 Excluding NIS 752 million for structured bond issues to subsidiaries and NIS 500 million for certificate of deposit issues to subsidiaries in 2010, and excluding NIS 9,804 million for issuing certificates of deposit to subsidiaries in 2011.

c. Exercise of bond warrants13 315 570 Total bonds 42,988 40,873 Total funds raised from the public and private 56,423 offerings 47,484

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 amendments 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 (this does not include prospectuses offering commercial securities), and – as aforesaid – within a short time span (see Section 23a. of the law). Near the effective date of the shelf prospectuses arrangement, 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 instrument, including events which constitute violations of reporting requirements, which will be examined by the ISA, and may result in a possible denial of a company’s entitlement to offer securities under shelf prospectuses or subject it to certain conditions. Currently, in light of its experience, the ISA is examining the possibility of proposing amendments and changes to offerings under shelf prospectuses (and prospectus offering reports thereof), including as regards the entitlement of companies to offer their securities under shelf prospectuses (not necessarily due to reporting violations) and updating the staff bulletin accordingly. Recommendations for amendments are expected to be published in 2012 (in addition to staff bulletins and announcements published in 2011 and as detailed below). During 2011, the ISA published a number of staff bulletins and announcements regarding offerings by way of prospectuses and shelf prospectus reports thereof, including the following: 1. Change in terms and conditions requiring amendment of shelf prospectuses (Decision 103-26) – given that a few years have elapsed since the shelf prospectus arrangement has come into effect, and due to the numerous changes made by corporations in the terms and conditions of securities described in shelf prospectuses, the ISA staff deemed it necessary to clarify its position regarding the manner in which changes to the terms and conditions of securities are to be

13 NIS 58 million of which by subsidiaries in 2010; NIS 228 million of which by subsidiaries in 2011. 38

made according to law. According to the staff bulletin, and as required by the various provisions of the law (Section 23a.(a) and (f) to the Securities Law of 1968, Regulation 25a to the Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) of 1969, Regulation 2 of the Securities Regulations (Shelf Offering of Securities) of 2005, securities offered by way of a shelf prospectus can only be those whose terms and conditions are explicitly stated in the shelf prospectus. Thus, the ISA staff clarified that any change of a detail regarding the terms and conditions of securities offered (including any detail which appears in the trust deed) which is not explicitly stated in the shelf prospectus, requires the amendment to the shelf prospectus in accordance with the provisions of the Law. The staff bulletin included a number of examples of changes requiring the amendment of prospectuses, including: (a) the addition or amendment of a lien or collateral and details of their terms and conditions; (b) the addition of a mechanism for change in interest as a result of rating changes, lack of rating, and terms and conditions thereof; (c) the addition of rights for prepayment of debt certificates initiated by the issuer and their terms and conditions; (d) the addition of causes for immediate repayment and details of such causes; (e) the addition of terms and conditions of loan covenants and their details; (f) the addition of a commitment to refrain from creating pledges (negative pledges) and its terms and conditions. 2. Announcement regarding shelf offerings in March – past reviews of shelf offerings have revealed that in a significant number of cases, prospectuses offerings were filed in March, prior to the issue of the annual financial statements. An announcement published by the ISA staff regarding this issue clarified that a shelf prospectus offering issued in March must be based on the annual financial statements as required by various law provisions (Regulation 60b of the Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) of 1968, Section 23a(g) of the Securities Law of 1968, Regulation 4 of the Securities Regulations (Shelf Offering of Securities) of 2005), which address the issue of disclosure provisions in prospectuses and whose purpose is to reduce to a minimum the asymmetry of information between an issuer and the public. Thus, in accordance with the Law and Regulations, financial statements included in shelf prospectus reports (including by way of reference) are those required to be included had the offering been made under a regular prospectus. This means that a corporation wishing to issue a shelf offering report in March which includes an offering of securities to the public, may do so only if the shelf offering report includes the financial statements which are required to be included had it offered the public securities under a prospectus on that same date, i.e. – the financial statements for the year ended prior to the date of the offering.

Table 3: Shelf Prospectus Reports in 2010-2011 Year No. of companies offering Total no. of shelf offering reports securities under shelf prospectuses 2010 95 216 2011 102 144

(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 the filing of immediate reports as well as annual and quarterly financial statements. As part of the ISA's ongoing monitoring of these reports, the Department is responsible for continuously sampling reports filed by reporting corporations, so as to ensure that the fair disclosure principles is met, as are the Securities Law, Regulations, and provisions, as well as generally accepted accounting and reporting principles. If necessary, 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, supplement 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 Investigations Department, following a hearing. (c) Financial reporting and valuations 1. Review of financial statements Two 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 review of financial statements of reporting corporations. During 2011, the ISA’s staff continued the initiated review of financial statements of reporting corporations. In reviews conducted this year, the ISA’s staff focused on the liability adequacy of implementing International Financial Reporting Standards (IFRS) as regards the following issues: a. Segment reporting (IFRS 8); b. The existence significant control and influence (IAS 27 ,IAS 28 ,IFRS 3), and the adequate accounting for holding rates, while examining whether a change in the nature of the holding has taken place (significant control/influence);

c. Revaluation of investment property (IAS 40) as well as property, plant and equipment items (IAS 16); classification of liabilities as current and non- current; d. 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; e. Impairment of financial instruments, especially the impairment of available-for-sale financial assets (IAS 39); f. Adequacy of the timing of creating and unwinding provisions (IAS 37); g. Accounting for business combination transactions under common control; h. Impairment of tangible and intangible assets; i. Accounting for Chief Scientist’s grants; j. Examining the manner and timing of recognizing income, including the income reporting basis (net or gross). Table 4: Initiated review of financial statements in 2008-2011 Year No. of financial statements reviewed 2008 10 2009 21 2010 66 2011 65

2. Valuations The use of valuations for the purpose of reporting or in order to establish the grounds for accounting data has been the practice for many years. However, the adoption of IFRS has increased the use of valuations. 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 reasonability of valuations. For this purpose, in 2011 the staff conducted in-depth examinations of a number of valuations, with the help – in some cases – of external experts. Such steps have led to increased disclosure as regards certain issues pertaining to valuations, including: Substantiating the assumptions; adding a disclosure as regards similar assumptions in other valuations conducted by the same valuer; sensitivity tests which expose to users the sensitivity of the valuation result to the various assumptions, etc. In addition, in certain cases – following the ISA’s interference – some companies were required to restate their financial statements, amend their valuations and improve the conditions offered to bondholders in creditor settlement agreements. In order to further improve the quality of valuations, the ISA issued a tender for the provision of valuation services. The tender was completed, with five assessors winning the tender.

(d) Transactions with controlling shareholders Transcations 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 harm 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 a third of the shareholders which had no vested interest as aforesaid. As part of Amendment 16, this number was increased so that beginning on 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 which include extraordinary 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. Recognizing the implications of such transactions, the Securities Law and Regulations address the specific requirements they entail: 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 contained 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 acquisition of operations, goods or equipment from a controlling shareholder; acquisition of shares in another company controlled by the controlling shareholder; sale of operations or assets to a controlling shareholder; collaterals; guarantees; deposits; financing agreements; provision of various services; insurance arrangements; acquisition of knowledge, etc. Amendment 16 has significant implications as regards the number of corporations required to approve such engagements and provide disclosure thereof. Such implications mainly arise from the addition of a provision to Amendment 16, whereby such transactions generally require approval by a special majority in a general meeting every three years. As regards transactions which do no include

42 tenure and employment of a controlling shareholder or relative thereof, certain cases may allow for longer periods of time for approval, as long as these are defined and reasonable under the circumstances. Following the Amendment, a significant number of companies convened general meetings for reapproval of existing transactions of this kind during the second half of 2011. Most of the transactions subjected to reapproval involved tenure and employment terms of controlling shareholders and their relatives as officers of the company. As in recent years, and especially in light of the aforesaid effect of Amendment 16, the Corporate Finance Department team invested significant efforts in examining disclosures provided to the public as regards such tranasactions, so as to ensure that shareholders have all of the information needed for them to reach voting decisions. In addition to examining the disclosure of the transaction itself, 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 an asset or activity in a transaction is material; whether the approval process of a transaction by various company organs is adequate, etc. As in previous years, in 2011 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, at the end of the year, 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. For more details regarding the aforementioned disclosure directive, see the Legislation chapter, Section F.1 “Disclosure Regarding Manner of Voting by Interested Parties, Senior Officers and Institutional Bodies in Meetings”. 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' auditing 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.

Table 5: No. of transactions with controlling shareholders in 2010-2011 Year Total no. of immediate reports regarding transactions between a company and its controlling shareholder14 2010 38615 2011 569

(E) Private offerings The Securities Regulations (Private Offering of Securities in a Listed Company) of 2000 (hereinafter – 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 of the company. A substantial offering is an issue to a party holding 5% or more of the issued capital or the total voting rights in the company, or to a party that will hold that amount after the offering, and any offering to a director or general manager 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 issued capital, the consideration paid (by way of cash and securities or otherwise) and the characteristics of the offeree. According to the Companies Law (following the enactment of Amendment 3 about a year ago), the general meeting is required to approve private offerings following the approval of the board of directors only when the offering is a “substantial private offering” as defined in the Companies Law.16 The

14 The data relate to the number of meeting summons reports for approving transactions with controlling shareholders published during the year. Some of these reports include approval of more than one transaction. 15In 2010, 470 transactions with controlling shareholders were brought to approval by shareholders' general meetings, under 386 summons reports. 16 According to the Companies Law, a "substantial private offering" is an allocation where one of the following transpires: 1. 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; 2. An offering which shall result in an individual becoming a controlling shareholder in the company.

Companies Law also that a private offering be approved when the controlling shareholder has a vested interest therein, whether or not it constitutes an exceptional transaction. This approval is to be granted under a special mechanism prescribed by the Companies Law. The 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 the 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 the 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) in 2010-2011

Year Total no. of reports regarding private offerings 2010 181 2011 135

(f) Purchase offers 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. An individual 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: the offeror's agreements with other parties; notices given by holders of securities in

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). 45 the target company to the offeror regarding their intent to accept the purchase offer; offeree exclusion; vested interests of offerees; approval by the audit committee of compensation in a repurchase offer , etc.

Table 7: Purchase offers in 2010-2011

Year Ordinary purchase Full purchase Special purchase Total no. of reports offer offer offer regarding purchase offers 2010 1 18 2 21 2011 12 44 0 56

(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 bank-issued credit. The global credit crisis and its local effects have adversely affected the issuing companies' ability to repay bondholders and subsequently recycle their debts. In 2011, 34 corporations initiated debt settlement proceedings with their bondholders, as compared with 20 in 2010. Ongoing processing of debt settlement agreements As part of its ongoing processing of debt settlement agreements, the ISA reviews disclosures made by companies both pursuant and prior to the settlement; the need for issuing a prospectus as part of the agreement so as to guarantee the proposed offerees' interests; 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 conducted and the disclosure provided to holders of securities of the corporation prior to making a decision regarding approval of the agreement. 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 amendment outline to the Regulations regarding additional alternative for the termination of companies’ reporting requirement (under Amendment 2 to the Periodic and Immediate Reports Regulations), beyond the existing alternatives under the current Regulations,17 in order to match them to current circumstances, including regarding a court-sanctioned increase in the number of securities holders, the

17 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.

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 issued. Table 8: Companies which ended their reporting requirements in 2010-2011 Year Total no. of companies 2010 20 2011 30

(b) Exemption applications Pursuant to the powers granted to it under the Securities Law, the ISA may exempt corporations from certain reporting requirements, including from the publication of prospectuses, in accordance with Section 15d of the Securities Law. Such exemptions are granted to companies that are listed outside Israel and 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 2010-2011 Total no. of No. of fully approved Year exemption exemption applications application filed 2010 71 64 2011 58 58 (1) (c) Extension 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 it is 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 therein. 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 went into effect 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.

Table 10: Extension applications filed in 2009-2011

Report Year No. of No. of Extensions Extensions Extensions applications applications granted granted granted filed18 denied for up to for 31-60 for up to 30 days days 60 days No. %

annual 2008 11 7 63% 1 – 3 Q1 2009 5 2 40% 2 – 1 Q2 2009 3 1 33% – – 2 Q3 2009 5 3 60% – 1 1

annual 2009 7 5 71% 2 – – Q1 2010 3 1 33% 2 – – Q2 2010 3 3 100% – – – Q3 2010 4 0 0% 1 3 – annual 2010 7 4 57% – – 3 Q1 2011 2 1 50% – – 1

Q2 2011 4 1 25% – 1 2

Q3 2011 0 – – – – –

3. Audits and outsourcing in the Corporate Finance Department As part of its implementation of the ISA’s supervision strategy, the Corporate Finance Department carries out 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. These audits are aimed at examining 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 investor interest. In 2011, the Department carried out seven audits under Section 56f of the Securities Law, as compared with six audits conducted in 2010.

18 In cases where one company submitted more than one application regarding a single report, all applications were deemed as one. The application was classified according to the last approved date.

The following are the main activities carried out as part of the audits and outsourcing during 2011:  Audits of corporations, both through outsourcing professionals and an ad hoc team of ISA employees, on issues such as corporate governance, review of valuations of real estate properties, the application of ISOX, and for the first time – in the field of natural gas and oil.  Issue and implementation of a tender for land appraisal service providers both in Israel and aborad. The tender was recently completed, with five land appraisers having won.  In addition to auditing, the Corporate Finance Department uses, through outsourcing, lawyers and accountants for the purpose of performing its ongoing tasks, especially in reviewing prospectuses and annual reports, during peak season. This enables the Department to improve its efficiency in peak periods in relation to periods where the scope of the work is normal. 4. Underwriter registry In July 2007, a comprehensive reform of public offering procedures went into effect. 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. From the moment the aforesaid reform went into effect, 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 underwritiers from the Registry. Table 11: Underwriter registry in 2010-2011 Total no. of active No. of foreign No. of inactive Year underwriters underwriters underwriters 2010 25 2 46 2011 23 2 46

In 2011, three companies were registered in the Underwriter Registry, none of which were registered as a foreign underwriter, as compared with four companies registered in 2010, one of which was registered as a foreign underwriter. In 2011, four underwriters announced they were ceasing activity, as compared with seven in the previous year 5. Dual listing In November 2000, an amendment to the Securities Law went into effect, adding Chapter E3 concerning the dual listing of companies. Under the amendment and a later amendment from 2005, corporations traded on the NASDAQ, NYSE, AMEX, or LSE Main Market, Primary Listing may be listed on the TASE on the basis of reports identical to those filed by said corporations abroad. According to the amendment, companies that were dual-listed when the amendment went into effect (dual listed

Companies) or companies registering for trade on the TASE in the future, and subsequently on one of the aforementioned exchanges, may begin reporting in accordance with Chapter E3, provided a majority of shareholders (non-controlling) 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. In the reporting year, three dual listed companies were listed for trading on the Tel Aviv Stock Exchange (presently there are 48 dual listed companies on the Tel Aviv Stock Exchange), as compared with five companies in 2010. In 2011, one company switched to the dual listed reporting format, as compared with none in 2010. As of today, there is a total of 45 dual listed companies on the Tel Aviv Stock Exchange. 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 examination 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 consideration 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 will first contact the SEC or FSA, as appropriate. C. Regulation – staff position papers and special projects in 2011 1. Staff and Plenum position papers 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 announcements to companies. Thus, the ISA seeks to increase transparency and minimize uncertainty among reporting companies. Staff and Plenum position papers: Staff and Plenum position papers are professional position papers which reflect the decisions and positions of the staff or Plenum on issues regarding the application 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 announcements to companies on its website, under the title Announcements to Companies.

FAQs: As of January 2008, all companies subject to the Securities Law file reports in accordance with the International Financial Reporting Standards (hereinafter – IFRS). In order to improve uniform accounting, minimize uncertainty regarding the application of IFRS, ensure fair disclosure in problematic areas, and in order to provide answers to questions raised by reporting entities and accountants regarding IFRS reporting during first-time adoption of IFRS in Israel, the Department's staff issued FAQs regarding matters pertaining to IFRS-compliant reporting, the application of the Standards, and additional disclosures required under the Securities Reglations and directives issued pursuant to the Law. The following is a list of the most significant SLBs issued in 2011: (2) Staff Legal Bulletin No. 101-13 – Clarification as regards the Quality of Disclosure Required under Regulation 10(b)(4) of the Securities Regulations (Periodic and Immediate Reports) of 1970 In accordance with the provisions of Regulation 10(b)(4) of the Securities Regulations (Periodic and Immediate Reports) of 1970 (hereinafter – the Reports Regulations), a company’s board of directors is required to include in the board of directors’ report, which is attached to the annual financial statements, the relation between the compensation awarded to senior company officers and principal shareholders (hereinafter, together – senior officers) and their individual contribution to the company during the reporting period, in accordance with the requirements of Regulation 21 of the Reports Regulations. In addition, the board of directors is required to note whether the senior officers’ compensation is fair and reasonable. The ISA staff attaches great importance to the details of disclosures provided in accordance with Regulation 10(b)(4) of the Reports Regulations, and therefore also to the test process and discussion conducted by the board of directors in accordance with the requirements of the Regulation. Thus, in February 2011, the ISA’s staff issued an SLB to clarify the issue. The SLB contains main emphases as regards the test and disclosure procedures which the audit committee and board of directors are required to apply in this matter, in accordance with Regulation 10(b)(4). (3) Staff Legal Bulletin No. 103-26 – Changes in the Terms and Conditions of Securities which Require the Amendment of a Shelf Prospectus When a number of years have elapsed since a shelf prospectus has gone into effect, and due to the numerous changes made by corporations in the terms and conditions of securities described in shelf prospectuses, the ISA's staff issued its position as regards the format for making changes in terms and conditions as required by law. (4) Staff Legal Bulletin No. 101-15 – FAQs regarding Amendment 16 to the Companies Law FAQs regarding Amendment 16 to the Companies Law (two parts): On March 15, 2011, Amendment 16 to the Companies Law of 2011 was issued

(hereinafter – Amendment 16). The main part of the abovementioned Amendment to the Companies Law of 1999 (hereinafter – the Law), went into effect on May 15, 2011. The purpose of Amendment 16 is to improve corporate governance in publically traded companies, especially: The eligibility of external and independent directors; the audit committee’s eligibility to serve as such and the manner in which it operates; the board of directors’ conduct; derivative claims; transactions with controlling shareholders; financial sanctions; purchase offers; and recommendations for implementing corporate governance. Due to the fact that this amendment materially changes prior requirements, the ISA’s staff issued its answers to some of the questions posed to it as regards changes in prior requirements. The answers were published in two parts. (5) Legal Staff Bulletin No. 104-15 – Reportable Credit Events Recently, the Israel Securities Authority has been made aware of a number of issues regarding reporting corporations' duty to issue immediate reports under Regulation 36 of the Securities Regulations (Periodic and Immediate Reports) of 1970 (hereinafter – Amendment 36) as regards engaging in loan agreements, change of terms and conditions of these agreements and commitments to uphold loan covenants. In light of these questions and the lack of uniformity discovered when reviewing reports issued by reporting entities as regards the aforementioned engagements, the staff of the Israel Securities Authority published its position regarding the scope of Amendment 36 as to these issues. (6) In October 2011, the Corporate Finance Department issued two exposure drafts regarding the materiality of errors found in the financial statements of reporting entities. The latter became binding in March 2012. i. Disclosure Directive regarding Restatement of Financial Statements While it is obvious that correcting errors are important to investors, and require the issue of an immediate report, disclosures provided by corporations which have discovered errors in their financial statements are not uniform. Seeking to set disclosure requirements regarding errors in financial statements, this directive solves the lack of uniformity in reporting thereof both in immediate reports and in the board of directors’ report to be included in the financial statements in which the material error has been corrected. ii. 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) This SLB 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 quantitive and qualitative – that serve the ISA's staff in testing for the materiality of errors in financial statemensts that would require 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. ISA position papers following public reports reporting companies On August 15, 2010, the ISA published a new database of references to staff position papers regarding reports published by reporting companies. This database contains staff positions regarding the treatment of specific cases, which the Staff deems to be of broad significance. The positions papers included in the database will be published in addition to pre-rulings on similar issues. During the second half of 2011, the ISA’s staff issued four staff legal bulletins as part of company reports. All SLBs dealt with controlling shareholders: 1. In July 2011, an SLB was published according to which when a controlling shareholder ceases to serve in some of the capacities for which the terms of his/her employment were approved, the nature of the services provided by him/her changes as well. Thus, the company must submit the changed employment terms to the approval of the required organs, in accordance with the provisions of Section 275 of the Companies Law. This SLB, which was extended in specific cases, was also published as part of the reports of the following companies: Ayalon Holdings Ltd., Isras Investment Company Ltd., and Malam Team Ltd. 2. In November 2011, the ISA issued an SLB following a report published by Kerur Holdings Ltd., according to which a private company’s articles of association constitutes a voting agreement between its shareholders, since they jointly hold its shares. 3. In December 2011, the ISA published an SLB following a report issued by Tadbik Ltd. According to the SLB, the Company, including all of its organs, is not authorized to classify a shareholder who votes against a transaction between the Company and its controlling shareholder as having a vested interest in the decision if the shareholder declares he/she/it has no such interest. 4. In January 2012, the ISA issued an SLB following a report published by Shlomo A. Angel Ltd., according to which one of the company’s material suppliers, for whom the company constitutes a material client, has a vested interest in transactions in which the company’s controlling shareholder has a vested interest. 2. Requests for pre-ruling 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

53 broad in scope, where the answer is not self-evident. The ISA prioritizes queries according to urgency and necessity, according to the abovementioned characteristics. There are two main kinds of queries:  Request for a pre-ruling regarding a planned transaction.  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 the answer thereto). The query and the answer are published on the ISA website, following criteria specified by the ISA. During 2011, the Corporate Finance Department received a total of 76 pre ruling inquiries as compared with 83 in 2010.

Table 12: Requests for pre-ruling in 2010-2011 No. of accounting Total no. of Year No. of legal inquiries inquiries inquiries 2010 51 32 83 2011 25 51 76

In 2011, 51 pre-ruling inquiries were submitted, as compared with 32 such inquiries in 2010. In addition, in 2011, the Department handled six legal pre-ruling inquiries which were submitted in 2010. Three of the legal pre-ruling inquiries submitted in 2010 also contained accounting issues and questions. Most of the legal questions in the past year dealt with the following issues: shelf prospectuses and shelf offering reports; whether an offering of securities constitutes a public offering; eligibility of external directors; approval of transactions with company officers and controlling shareholders; vested interest of a controlling shareholder; underwriting; holdings of principal shareholders; purchase offers; various arrangements, including settlement agreements with bondholders in accordance with Section 350 of the Companies Law; classifying directors as independent; joint holdings; criteria for issuing immediate reports; repurchase of securities; limits on the resale of securities; SEDA mechanism; prohibition on using insider information, etc. In 2011, 25 accounting pre-ruling inquiries were submitted, as compared with 51 such requests in 2010. Most of the accounting inquiries in the past year dealt with the following issues: independency; proforma financial information; existence of significant influence; existence of control; changes in holding rates of subsidiaries (including the question of loss of control and the possibility of recognizing revaluation profits);

income recognition;treatment of financial assets (including embedded derivatives); determining functional currency; hedge accounts, etc. 3. Accounting and auditing enforcement decisions (a) 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 2011, the ISA’s staff published four enforcement decisions on the following issues: identification and aggregation of operating segments; application of the equity method (“layer method”); fair value estimates of investment properties and application of the revaluation models to items of property, plant and equipment. (b) Decisions on auditing issues – the ISA’s staff attaches great importance to conducting adequate audits of the finanncial statements of reporting companies, and takes a number of steps to ensure that this goal is met. As part of the ongoing review by the ISA’s staff of financial statements published by reporting entities in order to ascertain that they meet the provisions of the law (including whether the financial statements were 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 an auditor auditing the financial statements of a reporting entity. 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, as part of the individual action taken, 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 the principles of disclosure and transparency and the ISA’s adherence thereto. 4. Special Projects in 2011 (a) The Reporting Improvement Project 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 investing 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 2012 a draft amendement of the Securities Regulations, applying all principles of the project, with the aim of applying all changes in disclosure provisions beginning with the 2012 annual financial statements. Background

In the past few years, ISA staff members examined disclosures published by companies as part of their annual and quarterly reports; the Barnea Committee’s recommendations regarding the development of industry- specific disclosure requirements; developments in the area of disclosure requirements in the past few years, including the application of IFRS to financial reporting in Israel; as well as similar steps taken by other securities regulators worldwide. In addition, ISA staff members met with various market players, including representatives of institutional entities, lawyers, underwriters, CPAs and analysts. In general, the market’s view is that the description of a company's business is adequate and undoubtedly represents a significant improvement as compared with the period prior to the implementation of the Barnea Report. Nevertheless, it seems that the current disclosure provisions and their application are deficient. The main problem seems to be the excess, immaterial information which is included in the reports, as well as the lack of uniformity and clarity in the application of disclosure requirements and insufficient business disclosure from management’s point of view. The Project includes, inter alia, modification of the reports’ format so that each chapter contains disclosure requirements with 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 report format The new format for the reports will include four main chapters, according to the following order: 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 a disclosure regarding management’s strategy, material changes in the economic environment, and the realization of forward looking information provided in the past. Other information may also be included in the management’s report, at its discretion. 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 56

industries, including investment property, entrepreneurial property, natural gas and oil activities, holding and investment entities as well as biomed companies. In 2010, the ISA published draft directives for the investment property, entrepreneurial property and natural gas and oil activity industries. A final version of the disclosure directives for the investment property industry was published in January 2011, and a final version for the natural gas and oil industry was published in March 2011. For further details as regards these directives, please see under Publications Pertaining to the Reporting Improvement Project below (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 thereto. Financial statements: Regarding the ISA’s initiative to examine ways to abridge financial statements (and memorandum on the matter) and an invitation to participate in a symposium on the issue, please see the ISA website. 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 annual 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 will include six parts: (a) details regarding company officers; (b) transactions with principal 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. Corporate governance questionnaire – the purpose of the Goshen Report was to indirectly incentivize the quality of corporate governance, i.e. – through the pricing of a corporation’s security, as opposed to setting specific corporate governance requirements for reporting entities. Nevertheless, the Goshen Report recommended that the ISA not require companies to explain why it has chosen not to adopt a certain principle (“adopt or explain”), but by way of “adopt or disclose”. Thus, the ISA has

57 decided, inter alia, to draft a questionnaire with questions covering issues that are relevant to corporate governance, which are based on the disclosure requirements contained in the Securities Regulations, Goshen Committee recommendations, and Amendment 16 to the Companies Law (including recommended provisions); the report includes a questionnaire in which a “true” answer on all questions constitutes an indication that proper corporate governance is in place, and vice versa; the questionnaire shall include various corporate govenrnance issues, including: (a) The board of directors’ conduct; (b) the conduct of the audit committee and the financial statements review committee; (c) approval and control processes regarding transactions with principal shareholders; (d) the internal auditor; (e) the independent auditor. In March 2012, the questionnaire was published for public comments through a disclosure directive, to be applied in 2012, until the legislative process of the project has been completed. In the first phase (the “preparation phase”), the questionnaire will focus on applying the requirements of the Companies Law, including the corporate governance provisions recommended by the First Amendment to the Companies Law. 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. A disclosure directive regarding investment property operations (the directive was published on January 11, 2011); b. A disclosure directive regarding natural gas and oil exploration operations (the directive was published on March 14, 2011); c. A disclosure directive regarding the field of entrepreneurial properties (published for public comment in July 2010); d. A draft legislative outline regarding the corporate governance report (published for public comment in February 2011); regarding the publication of a disclosure directive – see above. e. A draft legislative outline regarding the risk factor chapter (published for public comment in April 2011); f. A draft legislative outline regarding the financing and liquidity chapter (published for public comment in May 2011); g. A draft legislative outline regarding solo reports (published for public comment in June 2011); h. A draft legislative outline regarding management’s discussion and analysis report (published for public comment in June 2011). The following is a list of the key disclosure directives published during the reporting year and how they were handled: a. Investment property – in January 2011, the ISA published a directive for investment property companies regarding reporting policies for this industry. This disclosure directive was the first phase of the Reporting Improvement Project.

The directive includes a new reporting format, which makes more extensive use of tables, thus facilitating the reading of annual reports and the extraction of data thereof. According to the directive, companies are to report details regarding comparative periods corresponding to those required in financial statements: Consequential data shall be required for three periods, but balance sheet data shall be needed for the reporting year and the end of the corresponding period. The report will also include financial measures which are not based on IFRS, so as to increase comparability for the performance of the same company across different periods, as well as among different companies operating in the same industry. Thus, for example, the disclosure directive for the investment property industry establishes the use of accepted industry benchmarks, such as Same Property NOI and Funds From Operations (FFO), which are significant and widely used for assessing the results and value of investment property companies. The disclosure directive provides entity level disclosure, but also focus on companies’ key assets and projects. During 2011, the ISA staff examined the application of the disclosure directive by relevant reporting entities, and shall continue to do so in 2012. b. Entrepreneurial property – after the ISA published a draft of the directive for public comment in July 2010, it pubished – in March 2012 – a second draft, which includes an application of the changes adopted, inter alia, due to public comments on the first draft and in light of the ISA’s experience following the application of the investment property disclosure directive. Another draft – in which the adopted changes were highlighted – was published for another round of public comment. The directive is expected to come into effect at the time when second quarter financial statements are due (in August 2012). c. Natural gas and oil – in March 2011, the ISA published a directive for natural gas and oil companies as regards industry reporting policies. In the past two years, this industry has experienced growth in oil and natural gas exploration activity following the discovery of underwater deposits in the Tamar and Dalit drillingss. The draft directive deals with all aspects of reporting for oil and natural gas companies – annual reports, quarterly reports, immediate reports and prospectuses. One of the directive’s main highlights is that reporting on resources and reserves of natural gas and oil shall be made according to the international SPE-PRMS model. This model constitutes the basis for reporting on reserves and resources in the gas and oil industry in most developed countries, including the US and Canada. The directive also includes additional mechanisms for control over reporting. These control mechanisms include the use of independent and qualified professionals, as well as a management representation and disclosure mechanisms for the underlying assumptions used in preparing

reports. During 2011, the ISA’s staff examined the application of the disclosure directive by relevant reporting entities, and shall continue to do so in 2012. (b) Underwriting In the past few years, security offerings have been made mostly without the commitment of underwriters. As a result, such offerings are conducted without an underwriter being responsible for misleading details in prospectuses. On the other hand, during this time, the significance of gatekeepers outside corporations has become all the more evident. When an offering of securities to the public is made, this becomes doubly important, since – being party to the transaction – corporations are motivated to paint a bright picture of their position. Underwriters have served as external auditors of the quality of discovery in prospectuses around the world as well as in Israel – in the past. Since the situation in Israel has changed in the past few years, the ISA’s staff published an extensive paper which deals with the manner in which underwriters should be included, once again, in public offerings and other offerings. The paper offers, inter alia, to decrease the scope of early commitments, raise the amount of deposit required from underwriters, and establish a requirement to issue a draft prospectus. In addition, the ISA staff offers, when the amendments come into effect, to begin supervising the quality of due diligence examinations conducted by underwriters. During the year, public comments regarding this paper were received, and the ISA is currently engaged in turning it into legislation. (c) Corporate Governance – Amendment 16 and 17 to the Companies Law Companies Law (Amendment 16) of 2011 (hereinafter – Amendment 16) Amendment 16 was published in the Official Gazette on March 15, 2011 and went into effect on May 15, 2011. The purpose of the Amendment is to improve the quality of corporate governance in publically traded companies, adjusting it to the Israeli market and to principles accepted in this field worldwide. The Amendment is the result, inter alia, of the recommendations of the Corporate Governance Committee headed by Prof. Zohar Goshen, which were published in December 2006. When Amendement 16 came into effect, having materially changed earlier arrangements, the Department’s staff issued a number of staff bulletins representing its positions as regards application issues. Companies Law (Amendment 17) of 2011 Amendment 17 (hereinafter – Amendment 17) was published on August 18, 2011, and went into effect in February 2012. The Amendment deals with applying corporate governance principles on companies offering bonds alone, similar to the principles which apply to public companies, mutatis mutandis. The Amendment is based on a concept that bondholders are entitled to the same protection awarded by the Companies Law to shareholders from among the public, deeming that applying similar protective measures to bondholders is

60 justified, such as adequate control over financial statements, approval of transactions with controlling shareholders and giving the board of directors greater independence. Since Amendment 17 went into effect, the staff of the Corporate Finance Department is examining its ramifications, including by collecting responses and conducting discussions with professionals from among corporations that the Amendment applies to. (d) ATM Corporations have been using an exclusion clause contained in Section 15(b)(3) of the Law, which states that an offering of securities made while a company is traded on the Stock Exchange does not constitute a public offering. Thus, for example, companies which have repurchased their stocks or bonds use this exclusion, selling securities they own back to the secondary market. Thus, they are, in effect – both in economic and accounting terms – raising funds or a new debt from the public without issuing a prospectus. In addition, the ISA’s staff examined a type of offering which exists in the United States, where it is called “At The Market offering” (ATM). This type of offering enables corporations to sell securities – whether these have been purchased in the secondary market or are issued for the first time – during the regular course of trading at the stock exchange. When the advantages of this type of offering are weighed against its counterparts – uniform and non uniform offerings – it turns out that an ATM offering saves costs (whether because there is no need to market such offerings or because marketing them is prohibited) and due to the relatively small number of securities sold in this manner each day and since there is no need to announce in advance the date of the offering, which is usually more extensive in size. However, this type of offering also raises certain concerns, especially since, naturally, secondary market traders cannot know they are facing a corporation rather than a trader such as themselves, a fact which raises concerns regarding information asymmetry. Thus, the ISA’s staff has been working on a paper, to be published for public comment, which will prevent companies from offering securities to the public through the secondary market without issuing a prospectus. This paper further offers to adopt a model similar to the ATM model and turn it into legislation. A number of measures are offered regarding this model, with the aim of alleviating adoption concerns, including initially implementing it for a two year trial period. (e) Revocation of Regulation 51(b) Subsection (a) of Regulation 51b of the Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) of 1969 (hereinafter – the Regulations) requires to describe in the prospectus companies in which the issuer has invested or plans to invest 50 percent or more of its total assets (including the proceeds of the offering). Subsection (b) provides for exemption from such disclosure if the proceeds of the offering are invested in an investment grade banking corporation or insurer

(hereinafter – a regulated corporation) This sweeping disclosure exemption is granted, inter alia, based on the assumption that investment grade regulated corporations do not pose a significant credit risk and thus, information about their financial position is not highly beneficial to investors. The global crisis has exposed the fact that even high grade regulated corporations pose a certain credit risk, which may even be significant, and that information about them is important to reasonable investors. In order to enable investors to price their investments, they require relevant information. However, regulated corporations have taken full advantage of the exemption contained in Subsection (b), establishing subsidiaries which are engaged in nothing but issuing bonds, the proceeds of which are deposited in them. It thus follows that instead of receiving the information necessary in order to make an investment decision as regards these bonds – information about the regulated entity – investors get a dummy prospectus, which includes information about a corporation with zero activity. In addition, in order to ascertain that the information investors need is complete and not misleading, the Securities Law determines that disclosures contained in the prospectus carry prospectus liability. However, in this respect, investors experience legal uncertainty as to the question whether the liability applies to disclosure regarding the regulated corporation or whether it applies to the dummy prospectus which includes shallow information regarding the subsidiary. In order to put an end to this anomaly and equalize the status of investors in bonds of regulated corporations to those investing in bonds of other corporations, the ISA’s staff initiated an amendment to the Regulations which revokes the aforesaid exemption. (f) Supervision over auditors (PCAOB) Financial statements constitute a significant part of the overall disclosure provided 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 according to which these auditors are paid by audited entities, have led developed markets – mostly, yet also some emerging 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. The flaws inherent in the independent auditor model, as well as the supreme significance of this profession, highlight the extreme significance of establishing such an independent statutory, non-for-profit body in Israel. This body would supervise, on an ongoing basis, accounting firms auditing reporting companies, and will be charged with the audit process conducted by its members, setting auditing standards and principles as regards quality control and independency, as well as improving the audit process on an ongoing basis. The purpose of establishing this body is not only to improve the quality of disclosure and measurement, but also – inter alia – to promote the opening of

the market to foreign investors, foreign brokerage firms and promote cooperation with other Western markets. In order to enhance and strengthen this initiative, the regulatory environment in Israel should be on par with that in target markets. The establishment of such a body is, therefore, a key condition to the ongoing development of the local capital market. In 2011, the Corporate Finance Department conducted a thorough examination of this issue in a number of countries, in order to create – along with the Legislation Department – a bill which will be distributed and promoted in 2012. (g) Handling the crisis The considerable solvency problem which has hit international financial markets requires the development of new risk handling tools, whether by early identification of risk factors in reporting entities or by developing tools which would enable optimal disclosure to security holders for the purpose of pricing such entities during such times and while a risk is being managed by that entity, as well as the development of tools which will enable bondholders to conduct more efficient negotiations in order to preserve their rights in the event of a crisis at the reporting entity. Such tools include, inter alia, means for gathering data which will enable to identify market trends and troubled companies; imposing disclosure requirements on companies regarding placing collaterals on controlling shareholders’ stock; examining the possibility of providing information about “problematic players” in the market, including the possibility of barring some of them from raising funds from the public once again; addressing the phenomenon of public shells (please see below); addressing the issue of dividend distribution while adjusting distribution criteria, etc. The feasibility of using these tools or parts thereof will be discussed in 2012. (h) Public shells In 2011, the ISA’s staff started the Public Shells Project, aimed at establishing its position as regards the public shell phenomenon. As part of the project, the staff mapped all companies which constituted a public shell for a period of time during the past seven years, and collected information according to various criteria as regards these companies, in order to examine the economic benefits investors derived from investing in them. The staff’s recommendations regarding changing the existing situation will be developed in 2012. D. ENFORCEMENT 1. Financial sanctions Chapter H3 of the Securities Law, which provides for financial sanctions,19 authorizes the ISA to impose financial sanctions on any individual for violating the provisions of the Securities Law and Regulations which have been listed in Amendment 5 to the Law. On January 27, 2011, the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments) of 2011 (hereinafter – the Amendment) was published,

19 Chapter H3 of the Law regarding financial sanctions went into effect on October 1, 2007. 63 and related provisions regarding financial sanctions, inter alia those contained in the Securities Law, were adjusted accordingly. The Amendment went into effect on February 27, 2011, as were the Securities Regulations (Reduction of Financial Sanctions) of 2011, according to which financial sanction amounts appearing in Amendment 6 to the Law may be reduced. In decisions taken by the ISA to impose financial sanctions in 2011, the sanction amounts were reduced in some cases, in accordance with the provisions of these regulations. According to Section 52O of the Law, the ISA will impose financial sanctions on violators of any of the provisions specified in Amendment 5. The ISA collects the fines and transfers them to the State Treasury. Table 13: Financial sanctions imposed in 2011-2010 Amount of financial sanctions (in Year No. of financial sanctions NIS millions) 2010 20 2.25 2011 13 2.29

The following is a list of violations for which financial sanctions were imposed: Delinquent filing of financial statements; failing to disclose transactions with controlling shareholder as required by law; issuing a misleading and erroneous immediate report regarding the nomination and beginning of tenure of an external director; failure to provide an update in an immediate report as regards a material development in FDA approval; failure to provide required disclosure in annual report regarding the company’s debt certificates; failure to disclose a corporation’s liabilities according to repayment dates (T-126); flaws and defects in the company’s report regarding CEO’s employment and tenure terms; delinquent reporting of changes in holdings of a principal shareholder.

VI INVESTMENT DEPARTMENT 1. Mutual funds General .א As of the end of 2011, the number of mutual funds stood at 1,261, all of which were open-end funds. During the year, 80 new open-end mutual funds were created and 66 ceased operations, 18 of which were liquidated with the rest merging with other mutual funds. As of the end of the reporting year, there were 22 active mutual fund managers, as compared with 27 managers in 2010. One fund manager is licensed to serve as such but is inactive in this field. As of the end of 2011, the number of active mutual fund trustees stood at six, with two additional trustees licensed to serve as mutual fund trustees but not serving as such. The decrease in the number of fund manager stems from the continued trend towards mergers in this sector. Three out of the five fund managers which have ceased operations have continued to be active in the mutual fund field, but transitioned to serving as external portfolio managers for the funds which had been under their management. Despite the decrease in the number of active entities in the industry and the significant number of mergers, the number of funds available to the public remained nearly unchanged. The trend towards increased size for mutual fund was curbed this year. The average size of a mutual fund decreased for the first time in three years. This stems mainly from the significant redemptions and capital losses which characterized this industry in 2011. The value of assets20 under management by mutual funds as of the end of 2011 totaled NIS 142.3 billion, as compared with NIS 156.6 billion as of the end of 2010 (please see table 14 below). During the year (February 2011), the value of assets under management by mutual funds reached NIS 162.8 billion (an all time high). However, on the last day of trading in 2011 (December 29, 2011), the value of assets was the lowest for the year – NIS 142.3 billion. This decrease in asset value stems primarily from excess redemptions.

Table 14: No. of mutual funds and value of assets under their management in 2007-2011 Year No. of funds Value of Average fund assets (in NIS size (in NIS billions) millions) 2007 1167 120.4 103 2008 1185 98.1 83 2009 1202 133.2 111 2010 1247 156.6 126

20 In current prices.

2011 1261 142.3 113

Under the provisions of Section 73(c1)(1) of the Joint Investment Trust Law of 1994, 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. On December 31, 2011, the list of defining titles for classification purposes was updated. The following table includes data regarding mutual funds by classification, updated as of 2011 year end.

Table 15: Statistical data regarding mutual funds, by classification, for 2011 2011 No. of Value funds (as of of assets Percentage Classification of funds December (in NIS of fund (title) 29, 2011) billions) assets Flexibility 32 1168 0.8% Israeli shares 139 5394 3.8% Foreign shares 94 2631 1.8% Leveraged & strategic 22 1094 0.8% Money market fund 41 34076 23.9% Israeli bonds – NIS 250 33567 23.6% Israeli gov’t bonds 149 19808 13.9% Israeli bonds – foreign currency 10 311 0.2% Israeli bonds – corporate and convertible 164 14219 10% Israeli bonds – general 258 24221 17% Foreign bonds 59 3388 2.4% mixed 2 118 0.1% For non-Israeli only 6 82 0.1% Fund of funds 35 2209 1.6% Total 1261 142288 100%

Chart 1: קרנות לפי הסיווג כשיעור מנכסי הקרנות

מניות בארץ 2.4% 5.4% 3.8% קרן כספית 23.9% 17% אג"ח בארץ- שקליות

10% אג"ח בארץ- מדינה

23.6% 13.9% אג"ח בארץ - חברות והמרה אג"ח בארץ - כללי אג"ח בחו"ל אחר

Permits to hold means of control in fund managers and licensing of fund .ב 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. Two21 applications for permits to hold the means of control in a fund manager were handled and approved during the reporting year. No applications for permits to act as fund manager were submitted or approved during the reporting year. Applications to act as fund manager trustees 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. Prospectuses .ג Granting permits to publish prospectuses The prospectus of an open-end mutual fund remains valid for a period of up to twelve months from the date of publication. In order to ensure continuity in the offering of mutual fund units to the public, fund managers must publish a prospectus at least once a year. In 2010, the Joint Investment Trust Regulations (Details of Trust Fund Prospectus, its Form and Structure) of 2009 came into effect, under which the format of fund prospectuses was altered. The main changes stipulated in the Regulations involved the structure of the prospectus, adjusting the information included in it to changes in the capital markets and fund activity, expanding the types of information included in the prospectus and extending the period regarding which information is provided, while reducing the size of the prospectus and making it

2 The number of permits was higher, as applications are generally filed jointly for all holders of a fund manager, while permits are personal and given to each holder separately.

more friendly to the investing public. During the reporting year, the Department’s staff assimilated the abovementioned changes, creating a new practice, including through staff bulletins and FAQs in answer to various issues arising from said regulations. In addition, professional tools and control tools were developed for the purpose of reviewing prospectuses. In 2011, 1,302 permits to publish prospectuses were granted, 80 of which were for prospectuses of mutual funds offering their units to the public for the first time (as compared with 1,269 permits in 2010, of which 126 were for mutual funds offering their units to the public for the first time). In addition, permits were granted for the publication of 15 prospectuses for fund managers (Part B of Fund Prospectus). Since the two-part prospectus is a new format introduced in the middle of 2010 – at the time when the Joint Investment Trust (Details of Trust Fund Prospectus) Regulations of 2009 went into effect (hereinafter – the Prospectus Details Regulations) – all fund managers were required to file fund manager prospectuses on adjacent dates, shortly after the new format went into effect. In order to refrain from such situations, which have resulted in a considerable workload in a short period of time (on law firms preparing the prospectuses as well as on ISA staff members) the chairman of the ISA was granted the power – under a transition provision contained in the Prospectus Details Regulations – to extend the period for the first fund manager prospectus filed by a fund manager. This enables to postpone the prospectus renewal date without disrupting the offer of units. The Chairman of the ISA did indeed make use of this power, thus dispersing the dates for publication of fund manager prospectuses. As a result, 15 permits for the publication of fund manager prospectuses were handed out in the reporting year, although there are 22 active fund managers in the industry. Reports .ד (i) During the reporting year, there has been a significant increase in the number of reports published by fund managers. In 2011, 33,174 reports22 were published (as compared with 30,05723 in 2010), as follows: 32,758 Reports required of mutual fund managers under the Law and Regulations (as compared with 29,420 in 2010); 416 Reports required of mutual fund trustees under the Law and Regulations (as compared with 637 in 2010). (ii) Additional reporting-related actions during 2011: 1. Updating the format of the monthly report – the ISA staff made use of its power under Regulation 22(a) of the Joint Investment Trust Regulations (hereinafter – the Reports Regulations), updating the format of the

22 The number pertains to public reports alone (reports issued to the public) and does not included non-public reports.

23 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.

monthly reports which fund managers are required to file with the ISA and issue to the public. 2. Publishing an SLB for fund managers and fund manager trustees regarding a reporting requirement about assets whose value is determined in accordance with the guidance of the fund manager's board of directors – Joint Investment Trust Regulations (Purchase and Sale Prices of Fund Assets and Value of Fund Assets) of 1994, bind fund managers, in certain cases, and in other cases, enable fund managers to determine the value of a security according to guidance set forth by a fund managers’ board of directors (hereinafter – revalued assets). The Department's staff discovered some cases where the revalued assets constituted a significant portion of the value of a fund’s assets, thus constituting – according to the staff’s view – significant information for reasonable investors considering the purchase or redemption of units in a fund holding such assets, such as requires reporting under Regulation 20bb of the Reports Regulations. In order to create certainty, the ISA staff developed a rule whereby an immediate report requirement arises when the exposure to such funds exceeds 20% of the value of the fund’s assets. In addition, the rule stipulates that the fund is required to report in its periodic report (once a month) if the percentage of revalued assets exceeds 20% of the value of the fund’s assets during at least half of the trading days in the past month. 3. Amendment to the Treatment of an Application to Allow Publication of Prospectuses of Funds for Joint Investment Trust (hereinafter – Application Treatment) and publication of a circular for fund managers and trustees regarding reporting about publication of a prospectus for a new fund – as part of the cooperation between the ISA, the Fund Managers Union and the Stock Exchange, and for the purpose of improving information retrieval abilities about trust funds, it was decided to change the prospectus publication form. According to the Amendment to the Application Treatment, fund managers will be required to publish a new fund prospectus through an immediate report entitled “Publication of a Prospectus for a New Fund – Part A” (Form T131) and fill it with additional details regarding the fund, including details pertaining to the fund's underlying assets, the fund manager's fees, the trustee's fees, load charge, applicable tax rate, and additional details regarding the fund’s external investment manager. 4. Publication of a clarifications staff bulletin regarding the manner of providing information to identify trading activity on the Tel Aviv Stock Exchange by means of MAGNA forms through investment intermediaries. 5. Extending the Reporting Requirement Regarding Change in Fees Charged by fund managers and Trustees – on November 29, 2011, an exposure draft to amend the Report Regulations was published for public comments. According to the proposed amendment, as part of reporting changes regarding fees charged by fund managers or trustees, the reporting requirement shall also pertain to changes in fees prior to the

present change during a period of three to four years, as far as possible (taking into consideration the date of the initial offering of fund units to the public), so as to allow the investing public to include in its investment considerations the degree of stability in the fees of the fund manager and trustee. Fund manager participation in general meetings .ה 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 decisions that may harm the interests of unit holders, including approval of transactions with interested parties, and proposals that may favor the interests of unit holders. Section 77(c) of the Law requires fund managers who participated in such general meetings to submit a report to the ISA and the 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.24 Table 16: Participation rate of mutual fund managers in general meetings in which they are required by law to participate and vote in 2007-2011 Year No. of Participation by Participation by Participation by meetings less than 30% of 30% to 70% of more than 70% of managers managers managers No. of Rate No. of Rate No. of Rate meeting meeting meeting s s s 2007 785 177 22.6% 112 14.3% 496 63.1% 2008 548 57 10.4% 145 26.5% 346 63.1% 2009 705 91 12.9% 212 30.1% 402 57.0% 2010 1,005 20 2.0% 135 13.4% 850 84.6% 2011 865 55 6.4% 78 9.0% 732 84.6%

Data included in Table 16 indicate that over the years, mutual fund managers are more involved in the decision making process of reporting entities in general meetings.

24 In the absence of data regarding Securities held by mutual funds during the course of the 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 a meeting in which other fund managers are required to participate and that meetings summoned using T133 MAGNA forms (Report of a Transaction with a Controlling Shareholder) and T138 (Reporting of a Private Offering) – included an approval procedure for at least one decision in which the fund manager holding the securities of the company was required to participate and vote.

Chart 2: No. of Trust Funds in 2007-2011

1280 1261 1247 1260 1240 1220 1202 1200 1185 1180 1167 1160 1140 1120 2011 2010 2009 2008 2007

מספר קרנות

Chart 3: Asset value of trust funds in 2007-2011 (in NIS billions)

200 156.6 142.3 133.2 150 120.4 98.1 100

0 2011 2010 2009 2008 2007

שווי נכסי קרנות הנאמנות (במילארדי שח')

Onsite audits of mutual fund managers .ו During 2011, the ISA audited mutual fund managers as follows: (i) Six field audits of mutual fund managers were conducted by Investment Department staff and outsourced auditors. The audits focused on the following issues: the control environment – including management and control of investments, revaluation of securities, the manner in which transactions requiring special approval were handled, etc.; (ii) Fund managers were required to report the ISA regarding the implementation of recommendations issued following audits conducted in 2010; (iii) Cross-sectional audits (by correspondence):

(1) A cross-sectional audit of fund managers was conducted focusing on compensation of unit holders. A cross-sectional audit of a number of fund managers is conducted focusing on repairing errors in prices of trust fund units and compensation of unit holders. As part of the audit, several aspects of this issue was examined, including fund managers’ control systems for identifying errors in unit prices, the manner in which the compensation for the fund and unit managers is calculated, control systems over money transfers, etc.; (2) The Department completed a cross-sectional audit in all fund managers on the issue of remuneration of investment managers and senior officers. (iv) The Department reviewed securities activities carried out by fund managers, by analyzing transactions pointed at by current irregular activity reports, audits of particular managers, as well as cross-sectional audits focused on specific issues. Supervision of mutual fund trustees .ז The ISA increased supervision of fund trustees, as part of the overall reinforcement of its supervision over mutual funds. The ISA: Conducted visits in trustees’ offices, in which the ISA staff reviewed .א various aspects of trustees’ activities, including the demonstration of systems and modes of operation employed by the trustees; Examined the manner in which trustees base their quarterly opinions on .ב managing systems used by fund managers under their trusteeship; ;Examined how fund trustees reacted to lapses by fund managers .ג Performed both broad- and spot inspections of trustees to examine .ד various issues which arose during routine supervision of fund managers. ;Followed-up on trustees' quarterly reports .ה .Cooperated with the Association of Trustees on various issues .ו Regulation activities .ח (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 20 staff bulletins for fund managers and/or trustees on various issues pertaining to the provisions of the Joint Investment Trust Law – such as corporate governance, provisions regarding reporting and prospectuses as part of the implementation of the Joint Investment Trust Regulations (Financial Statements of Funds) of 2009 [Kovetz HaTakanot (Collection of Regulations) 6834, p. 230] and Joint Investment Trust Regulations (Details, Structure and Form of a Fund Prospectus) of 2009 [Kovetz HaTakanot (Collection of Regulations) 6834, p.

192], which went into effect in 2010; a circular regarding a cross-sectional review of audit findings, etc. During the reporting year, two circulars were published regarding ISA decisions: The first stated that fund managers should adopt an investment policy which includes a decision support system set by the fund manager, on which investment managers for the fund should rely on when making investment decisions and managing the fund’s investments on an ongoing basis. The second decision pertains to changes in the ISA’s list of defining titles for classification purposes in accordance with Section 73(c1)(2) of the Law. (ii) Pre-rulings 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, 17 pre-ruling requests concerning the Joint Investment Trust Law were received by the Investment Department. The handling of one such request was completed after the end of the reporting year. (iii) FAQs During the reporting year, the ISA staff continued to publish, on an ongoing basis, answers to questions addressed to it by supervised entities in the mutual funds sector. During the year, the staff published answers to questions on various subjects, so as to promote transparency vis a vis supervised entities and clarify the legal environment in which they function. Enforcement measures concerning fund managers .ט (i) Civil Fines Under Section 114 of the Law,25 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 Fund Law grants the ISA the authority to waive fines on violations of Sections 114 and 115 of the Law in specific exceptional cases. During 2011, the ISA imposed fines on four fund managers. During the reporting year, the ISA did not exercise its authority under Section 117(b)(2) of the Law. On February 17, 2011, the Securities Regulations (Reduction of Financial Sanctions) of 2011 (hereinafter – the Reduction Regulations) went into

25 The sections of the law mentioned herewith are in accordance with the law prior to the Streamlining of ISA Enforcement Procedures Law of 2011 becoming effective. The relevant sections were changed in the new law. The amendment went into effect on February 27, 2011.

effect. These regulations authorize the ISA to reduce civil fines in accordance with causes prescribed in the Regulations and by percentages detailed therein. In 2011, 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 2011 and fine amounts Violation for which fine was Sections violated Fine imposed in Joint imposed Investment Trust Law 1. Two violations of provisions Section On one fund under Section 61 of the Law: 114(c)(4)(b) of the manager – Deviated from the fund’s Law NIS 172,800 investment policies, and On a second during part of the deviation fund period, the deviation manager – amounted to more than 5% of NIS 86,400 the fund’s net asset value 2. Violation of the provisions of Section 114(a)(7) NIS 21,600 Regulation 2(c) of the Joint of the Law Investment Trust Law (Classification of Mutual Funds for Publication Purposes) of 2007: Did not file a report in a timely manner, as required by law 3. Violation of Section 73and Section NIS 86,400 Subsection 73(b)(1) of the 114(b)(16a) and Law: Publication of rate of 114(b)(16)(b) of return data in violation of the the Law formula required under the Regulations. Publication of a report regarding the fund without receiving the prior approval of the trustee

2. Exchange Traded Notes (ETNs) General .א At the beginning of 2011, seven groups of issuers were active in the Exchange Traded Notes (ETN) market, some of which included a number of companies each. During 2011, a consolidation process in the field began. As of today, five groups of companies issuing ETNs are active, following the consolidation of the Tachlit Group and the Index Group, and the consolidation of the Meitav Group and Mabat Group.

As of the end of the year, the number of ETN series reached 459, as compared with 437 as of the end of the previous year. Chart 4: No. of ETN Series in 2007-2011

459 500 437 412 400 380

300 265

200

100

0 2011 2010 2009 2008 2007

The value of public holdings of ETNs reached NIS 56.8 billion as of the end of 2011, as compared with NIS 57.7 billion as of the end of 2010, an increase of 1.6% (approximately NIS 1 billion). The reduction in the value of public holdings was the result of a fall in market prices of the series’ underlying assets, despite positive accumulation during 2011 (more than NIS 5.4 billion). Chart 5: Value of public holdings of ETNs in 2007-2011

57.7 56.8 60 49 50

40 34 29 30

0 2011 2010 2009 2008 2007

Prospectuses .ב The ETN market is comprised of a small number of issuers. In order to answer real time market demand, issuers make wide use of shelf prospectuses, which enable them to offer the public and list ETNs for trading within a short period

75 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 for additional approval from the ISA. The offering can therefore be made within a very short period of time – even a few days. During 2011, the ISA approved seven new shelf prospectuses, as compared with two such approvals in 2010. The rise in the number of requests to approve shelf prospectuses stemmed from the fact that most companies had shelf prospectuses which expired during 2011, since prospectuses are effective for a period of two years from their publication dates. For this reason, the companies were required to file requests to recive approvals for new shelf prospectuses. In 2011, seven amendments were made to shelf prospectuses, as compared with 13 such amendments in 2010. The amendments of the prospectuses in the past year were more complex in comparison with those made in previous years, due to the novelty of the products which were added to the prospectuses and the need to provide further disclosure regarding them. The prospectuses and amendments to prospectuses included, inter alia, the addition of series tracking local industry-specific indexes, which are prepared and calculated by foreign entities, as well as the extension of existing ETN series. It should be noted that 40 shelf offerings were published during 2011, as compared with 63 such offerings in 2010. When reviewing the prospectuses, the Department’s staff examined, inter alia, the economic summaries of the ETN series, while examining the implementation of the disclosure directive regarding economic and other details of indexed products; the scope of disclosure provided for the new indexes, emphasizing the implementation of the disclosure directive regarding description of indexes for indexed products; implementation of the disclosure requirements included in the directive regarding disclosure of credit risk, market risk and public holdings of financial instruments as well as disclosure regarding the ETNs’ exposure profile. In addition, a number of issues regulated in the trust deeds of the ETN series were also examined. Trustees .ג In 2011, the Department’s staff met with trustee firms active in the ETN field. Seven trustees are currently active in this field. The meetings included discussions of various issues, such as Amendment 16 to the Joint Investment Trust Law and the manner in which trustees control companies. Reports .ד ETN managers report to the public and the ISA in accordance with the Securities Law of 1968, its regulations, and specific disclosure requirements concerning disclosure of information regarding ETN series which have been offered to the public. The Department staff followed 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,26 such 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,27 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 in each ETN series and for all series of the issuing company and managing firm together; (iv) During 2011, ETN managers filed 5,517 reports (as compared with 5,833 reports in 2010 and 10,434 reports in 2009).

Chart 6: No. of reports filed by ETN managers in 2008-2011

12,000

10,000 10,434

8,000 7,478 6,000 5,833 5,517 4,000

2,000

2008 2009 2010 2011

Enhancement of ongoing disclosure and development of audit .ה mechanisms During the reporting year, the Department staff extended disclosure requirements and developed control mechanisms, as follows: (i) The staff extended the disclosure requirements regarding engagement in swap transactions on local indexes, due to the increase in the activity of ETN issuers in this area in 2011. Following

26 It should be noted that companies issuing structured products are bound by some of these reporting requirements. 27 “Managing body” refers to ETN managers, i.e. – to an investment house holding a number of ETN issuers. 77

this requirement, the firms issued detailed public reports regarding their engagement in swap transactions. The reports emphasized disclosure regarding all risks arising from the transactions, mainly credit risk and liquidity risk; (ii) 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 Trust 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; (iii) The staff developed specific MAGNA forms for the ETN field, so as to provide the public with easier access to information reported by the firms. As part of this effort, the staff is developing a form which will include all material information regarding ETNs. In addition, several amendments were made to other reporting forms, so as to adjust them to the activity of ETN firms; (v) During the reporting year, the staff changed the reporting format for firms using the MAGNA system – moving from reporting by PDF files to reporting by TXT files, whose data can be recorded by IT systems. (vi) The Department staff made adjustments to the disclosure provided as part of the general summary included in offering prospectuses as well as in periodic financial statements, in accordance with the disclosure directive regarding economic and other details of indexed products. Audits of ETN managers .ו During 2011, the ISA audited three ETN managers. The audits focused on risk management. During the year, a cross sectional audit was completed for all ETN issuers on the issue of compensation of traders and their superiors (the audit was begun in 2010). During the year, a cross-sectional audit was conducted with all ETN issuers, in which material submitted by issuers regarding corporate governance was examined. Regulatory model .ז During the past two years, the Staff has been engaged in developing a regulatory model for the ETN sector. On November 13, 2011, the staff issued the main principles of the regulatory model for the ETN field. 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) Market risks – models were established for the measurement and management of market risks Moving onto a regulated regime – regulating the ETN sector under the Joint Investment Trust Law (Amendment 16). This constitutes a move from a disclosure regime to a supervision and

regulation regime, applying the principles of mutual funds' corporate governance and strengthening the position and responsibility of trustees. As part of this process, assets backing ETNs for investor ownership will be held by trustees, and the ETN manager will only be liable for the difference between the value of assets held by investors and its liability towards them. This liability shall be adjusted on an ongoing basis, and shall be backed by allocating capital to a special account to be overseen by the trustee, providing an available safety cushion (a backing account). In addition, trustees shall be required by law to oversee ETN managing firms, as is the practice regarding mutual funds, including the VaR model and extreme scenarios. The model regulates the manner in which the value at risk is calculated, and provides the basis for an ongoing measurement of the company’s exposure and allocation of risk capital. (ii) Investment and credit risk principles – during the past year, the Department developed – in cooperation with ETN issuers – principles regarding the types of investors 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 risks to which they are exposed. (iii) Liquidity – as part of the principles of investment, a number of limits have been established regarding non-liquid backing assets, including the revaluation of assets according to their value upon immediate withdrawal. (iv) 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 behavior among ETN companies. Those principles shall be regulated in legislation as part of the process of regulating the activity in the ETN sector, through the early adoption of most principles in the ongoing activity in ETNs. Pre-rulings .ח In 2011, the Department staff handled one request for pre-ruling, as compared with nine such requests in 2010. Requests for pre-rulings and answers thereto are published on the ISA website. 3. Investment advisors, investment marketing agents and investment portfolio managers General .א As of the end of the reporting year, there were 5,302 licensed individuals (995 of whom were portfolio managers, 3,698 were investment advisors, and 609 were investment marketing agents). Table 18: Total no. of licenses granted to individuals – portfolio managers, investment advisors and investment marketing agents in 2006-2011

Investment Year Portfolio Investment marketing managers advisors agents (since 2006) Until 1165 4377 2006 2006 184 404 260 2007 226 666 202 2008 230 375 191 2009 212 365 151 2010 162 198 179 2011 152 248 144 Total no. of licenses 2331 6633 1127 granted

Table 19: No. of license applicants added each year in 2006-2011

Year No. of License Applicants

2006 4003 2007 3140 2008 2605 2009 2060 2010 2875 2011 2455

Licensed Companies As of the end of the reporting year, there were 181 licensed companies (of which 144 were portfolio management companies, 11 were investment advice firms, and 26 were investment marketing firms). The following are details regarding the value of assets under management by licensed portfolio management companies as of December 31, 2011. 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 of 2011 (hereinafter – the 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 2006-2011

שווי נכסים מנוהל בחברות לניהול תיקים (במילארדי שח')

250 232 223 200 198

150 127.6 115.5 118 100

2006 2007 2008 2009 2010 2011

שווי נכסים מנוהל בחברות לניהול תיקים (במילארדי שח')

Licensing .ב During the year, 544 licenses were issued to individuals (152 to portfolio managers, 248 to investment advisors, and 144 to investment marketing agents). Furthermore, 12 licenses were issued to companies (seven to investment portfolio management companies, three to investment advisory firms, and two to investment marketing firms). 22,925 individuals are currently at various stages of the licensing process, of whom 5,676 are pending licensing as retirement fund advisors.28 During 2011, 31 company licenses were revoked at the licensees’ request, of which 26 were portfolio management companies, four were investment advisory firms, and one was an investment marketing firm. (i) Examinations As part of the licensing of investment advisors, investment marketing agents and investment portfolio managers under the Advice Law, two examination sessions were held in May/June and November/December 2011, on the following subjects: a. Securities laws and professional ethics; b. Accounting; c. Statistics and finance; d. Economics; e. Professional A; f. Professional B (for those seeking investment a portfolio manager license).

28 This type of license is granted by the Ministry of Finance, but license candidates are required to pass four out of six licensing exams conducted by the ISA. 81

9,690 exams were held for 7,645 examinees, of whom 4,260 passed (see Table 20 below). Chart 8: Licensing examinees (by no. of exam units) in 2006-2011

10000 9690 9000 8852 8957 9137 8480 8000 7323 7000 6000 5000 4000 3000 2000 1000 0

2006 2007 2008 2009 2010 2011

מספר נבחנים בבחינות הרישוי

Table 20: Exam success rates in 2011 Subject No. of Examinees Annual success rate (%)29 Professional ethics 2 50 Securities laws and professional 1723 74 ethics Accounting 948 60 Statistics and finance 1013 53 Economics 1050 43 Professional A 2382 53 Professional B: 974 60

(i) Exemption from Examinations 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 Regulations,30 are entitled to exemptions from

29 An examinee who passed an examination at one of the two examination dates during the year is considered as having passed the examination.

30 It should be noted, that until May 2007, the Regulations granted exemptions based on relevant academic courses as well. 82 examinations. During the reporting year, 4,295 applications for exemptions were processed, of which 4,144 were approved. (ii) Disqualification of examinations due to copying attempt As part of the license examinations conducted by the ISA under the Licensing Law, examinees receive a set of instructions, which include clear rules regarding permitted and prohibited behavior during the exams. A violation of the instructions is regarded by the ISA as a disciplinary violation which may attest to the examinee’s credibility, with its various meanings. There are cases in which the ISA is called to decide whether there is room for disciplinary action against certain examinees for the alleged violation of said instructions. During the reporting year, the ISA continued to apply the procedure intended to set a scale of disciplinary actions taken by the ISA in cases of violations. According to the procedure, if an examinee attempts to copy material during the exam or violates other rules, his/her examination shall be revoked and the candidate shall be prevented from taking the tests at other dates, in accordance with the severity of the violation. Three exams were disqualified under the procedure. In two of the cases, the ISA decided to prohibit the examinees from taking any licensing exam on two additional dates, but in a third case, it was decided to prohibit the examinee from taking any licensing exam on one additional date. Chart 9: Processing of exemption applications in 2006-2011

14000 12384 12000

10000

8000

6000 4970 4295 4000 4025 3777 3600 2000

2006 2007 2008 2009 2010 2011

טיפול בבקשות פטור

(iii) Internship The abovementioned licensing regulations also regulate the compulsory internship for all applicants. During the reporting year, 615 internship applications were approved, of which 293 were for investment advising, 131 for investment marketing, and 191 – for portfolio management. Chart 10: Processing of internship applications in 2006-2011

1400 1268 1200 1000 857 800 804

600 615 535 524 400 200 0

2006 2007 2008 2009 2010 2011

טיפול בבקשות להתמחות

(i) Foreign Service Providers Registry After the amendment to the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Foreign Service Providers) of 2009 law and regulations went into effect, the ISA went on to regulate the registration of those wishing to be included in the Foreign Service Providers Registry. During the year, three foreign service providers were entered into the registry, along with two licensed corporations. (ii) Requests handled by the authorized board under Section 8a of the Licensing Law The board, which is authorized by the ISA to provide licenses under Section 8a of the Licensing Law, discussed 29 cases regarding the following issues: exemptions from examinations, partial or full exemption from internship and recognition of leave days during internships. (iii) Licensing denied due to credibility considerations During the year, the ISA denied license to an applicant, after he was indicted for having sent, in 2005, someone else to take the AMIRAM test (a test conducted by the Academic Center for Testing and Evaluation, for the purpose of obtaining an exemption from English studies and/or determining the level of English studies required) under his name, thus violating Sections 415(1) along with Section 25 of the Criminal Law of 1977, regarding obtaining by fraud. In accordance with the decision of the court, the proceedings ended with a plea bargain and without a conviction, with the accused to serve 180 hours of communal service for the public good. The ISA believed that in this case, the applicant’s deed is such that the ISA deems him to be unworthy of possessing a license for a significant period of time. However, due to the lengthy period of time that had elapsed since the date in which the deed was committed, which constitutes the most relevant point in time as regards the exam, the ISA decided to withhold the license for the applicant for a period of one year following the application date. c. Supervision

As of the end of 2011, 181 portfolio management, marketing or investment advisory companies were active in Israel, with a total of 5,302 individual license holders, who are employed by banks, portfolio management companies, investment marketing and advisory companies or work independently. 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. Supervision over investment advisors, investment marketing agents and portfolio managers focused mainly on the following issues: (i) Ongoing rapport with the supervised entities and close accompaniment The activity of the Department in 2011 included ongoing rapport with the 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 the 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 review the results of the examination independently and report to it on various matters pertaining to the Advice Law. In addition, the Department staff participates in the meetings of the investment portfolio mangers’ Compliance Officers’ Forum and in quarterly meetings with bank representatives from the Association of Banks in Israel. (i) Auditing (1) During the reporting year, two types of audits were conducted regarding compliance with the provisions of the Advice Law: Cross-sectional audits examining one particular issue in a large (א) number of companies. During the reporting year, 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. Company-specific audits – audits of specific issues related to the (ב) Licensing Law in licensed companies and advisory departments in banks. During the reporting year, the Department conducted 58 company-specific audits, 43 of which were completed during the year and 15 are yet to be completed, as follows: 27 of the company-specific audits were conducted in the offices of the companies or bank branches. 31 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 2011, the Department completed a cross-sectional audit regarding the compliance of licensed companies with the ISA’s directives regarding the requirement to establish work procedures. As part of this audit, 19 companies were examined. 2. During the reporting year, the ISA initiated a cross-sectional audit regarding the compliance of banking corporations with the provisions of the Law as regards advice activities. The audit included ten banking corporations. 3. During the reporting year, a cross sectional audit was initiated with all portfolio managers, by way of correspondence, on the subject of distribution accounts. 4. In addition, the Department began a cross-sectional audit in all portfolio managers on the issue of remuneration of investment managers and senior officers, by way of correspondence. 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, 17 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. 2. In addition to these audits, five audits initiated in 2011 have yet to be completed. 3. During the reporting year, 14 issue-specific audits were conducted with 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. 4. In addition to these audits, seven audits initiated in 2011 are still ongoing. 5. In 2011, the Department completed 12 audits in advisory departments of banks. These audits examined one or more of the following issues: duty of trust; identification of client preferences; adapting services to client preferences; prohibition of preferential treatment; duty of care; keeping

record of investment advisory sessions; supervision and guidance of advisors; quality of advisory services. 6. In addition to these audits, three audits initiated in 2011 have yet to be completed. (2) Audits examining compliance with the Prohibition on Money Laundering Law During the reporting year, the Department conducted audits with portfolio management companies that are non-bank Stock Exchange members (NBMs). The audits were conducted by outsourcing The audit examined the companies' compliance with the Money Laundering Prohibition Order, including: identification requirement; verification of identifying details; statement regarding controlling shareholder and beneficiary; identification in person; keeping of identifying documents; regular and special reporting to the Money Laundering Prohibition Authority; the existence of a computerized database. (ii) 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. (iii) Enforcement of reporting requirements and examination of reports In 2011, the ISA enforced reporting requirements in the following matters: 1. Full, accurate and timely filing of annual reports in accordance with Section 27(a) of the Advice Law. 2. Reporting any failure to comply with the terms of the license in accordance with Section 27(c) of the Advice Law. 3. Reporting of licensed staff by 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 Advice Law The Investment Department investigates alleged violations of the Advice Law. These investigations are carried out following public complaints or following suspicions that arise during the ordinary course of the Investment Department's operations. In addition to conversations with those persons submitting complaints, investigations include meetings with those persons, contacting banks and Stock 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, 89 cases of prima facie criminal and/or disciplinary violations were investigated, of which 21 cases were from the previous year. Of the 89 cases investigated, 69 cases were closed, as follows: 29 cases were handled in the following manner:  Seven cases were submitted for auditing.  In seven 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.  Two cases were transferred to other departments.

 Five cases were forwarded to handling on an enforcement level.  Eight cases were forwarded to other authorities. 40 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 or because the complaint was diminutive. As of the end of 2011, 20 cases were still pending. d. 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. This 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 two conferences for licensed companies. The first conference focused on administrational enforcement and efficient internal enforcement, while the second focused on identification of client preferences and the issue of complaints filed with the ISA against license holders. (vi) Training In order to improve compliance by licensed companies, the ISA continued to provide training to all new companies in 2011. 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 Advice Law and the Prohibition on Money Laundering Law, including the company's duties towards its clients and towards regulators. Furthermore, 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 2011, 12 training sessions were carried out, 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. Regulation activities (i) Directives in Accordance with Section 28 of the Licensing Law Section 28(b) of the Advice Law authorizes the ISA to issue directives regarding the operation and management of license holders, officers in license holders and all persons employed by license holders, in order to assure the proper conduct of license holders. During the year, the ISA issued the following directives: 1. Directives to Investment Advisors regarding Participation in Conferences and Receiving Promotional Products from Financial Assets Managers (New Version – 2010) – the directive revises a former directive dated July 12, 2006. The new version of the provisions is the result of lessons and insights learnt during the implementation of the former version. The purpose of these provisions is to clarify that investment advisors may participate in conferences held on the initiative of a financial assets management firm or sponsored by one without the advisor or his/her employer paying the full conference participation fees for the advisor, provided that the conference is of professional nature, whose only purpose is to familiarize the advisor with the financial assets marketed by the conference organizer or the conference’s sponsor and with the professional staff which develops and manages the products. 2. Directive to License Holders regarding the Presentation of Performance in Managed Portfolios to those who are not Owners of the Managed Portfolio and Publication of the Performance Data – due to the lack of uniform universal standards for classifying clients and characterizing investment policies in managed portfolios, the presentation of past performance cannot serve as a reliable indication for the quality of service provided to clients. However, such a presentation may cause risk elements to surface when presenting to potential clients. Thus, the directive allows to present past performance data, provided these are accompanied

by a detailed explanation of the risk elements embodied in the relevant investment portfolio or group of investment portfolios, with reference to the relationship between risks and returns. Such a presentation can only be made by a license holder in a face to face meeting. The provision limits the presentation of past performance to returns on specific portfolios alone, addressing periods defined in the provision. The provision requires the investment advisor to present returns on the portfolios featuring the best and worst performance achieved in the specified risk level/s each year during the specified period. In addition to presenting the minimum and maximum returns in the specified risk level as aforesaid, it is also possible to present only the average past performance in all portfolios in the specified risk level for each of the years in the specified period, calculated according to the simple average method. It is prohibited to publish any past returns whatsoever. In addition, the directive prohibits portfolio managers or any representative thereof to publish or present past returns on a financial asset or a pension product managed by a related company or in which the portfolio manager invests. (ii) Staff Bulletins he 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 2011, the staff issued five 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. (iii) Pre-rulings During the reporting year, 30 pre-ruling requests concerning the Advice Law and the Prohibition on Money Laundering Law were received by the Investment Department. Three of them are still pending. (iv) FAQs During the reporting year, the ISA staff continued to publish, on an ongoing basis, answers to questions addressed to it by supervised entities. e. Enforcement activities concerning license holders (i) Civil fines imposed under Chapter G1 of the Law31

31 On February 27, 2011, the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments) of 2011 went into effect, with the relevant sections having changed. Since the violations detailed in this chapter (except for one) were committed prior to the abovementioned amendment going into effect, the mentioned sections – except where noted otherwise – are in accordance with the law prior to the amendment.

According to Section 38A of the Advice Law, the ISA Chairman 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 five licensed firms in 2011. On February 17, 2011, the Securities Regulations (Reduction of Financial Sanctions) of 2011 (hereinafter – the Reduction Regulations) went into effect. These regulations authorize the ISA to reduce civil fines in accordance with causes prescribed in the Regulations and by percentages detailed therein. In 2011, the ISA exercised its aforementioned authority in 13 cases (please see table 21 below). The following table details the violations for which fines were imposed in the reporting year and fine amounts: Table 21: Violations for which fines were imposed and fine amounts Violation for Sections of Fine amount which fine Advice Law was imposed violated

5 continuing Sections 38a(d) 4 companies violations of and 38d(a) were fined Section 27(c3) NIS 20,723 each and one company – NIS 19,429.

No fines were appealed. In addition, it was decided in 2011 to impose nine fines, the notifications of which were sent after the end of the year.

Table 22: Violations for which fines were imposed in 2011, for which notifications were sent in 2012, and fine amounts Violation for Sections of Advice Law Fine amount which fine was violated imposed 1 Section 13(b)(2) Section 38a(b)(1) or NIS 110,700 and Section 26(a) Section 38a(c) and Section in conjunction 38a(b)(2) or Section 38a(c) with ISA directives in accordance with Section 28(b)

2 Sections 12, 13, Sections 38a(b)(1) or NIS 139,400 26(a) in Section 38a(c) and Section conjunction with 38a(d) or Section 38a(c) ISA directive in accordance with Section 28(b) and Section 17(a) 3 Section 26 in Section 38a(b)(2) or NIS 120,000 conjunction with Section 38a(c) Section 28(b) of the Law 4 Section 26(a) in Section 38a(b)(2) and NIS 135,000 conjunction with Section 38a(c) of the Law ISA directive in accordance with Section 28(b) of the Law 5 Section 13(a)(3) Section 38a(b)(1), Section NIS 20,250 and Section 26(a) 38(b)(2) and Section 38a(c) in conjunction of the Law with Section 28(b) of the Law 6 Section 26(a) in Section 38a(b)(2) or NIS 15,750 conjunction with Section 38a(c) of the Law ISA directive in accordance with Section 28(b) of the Law 7 Section 17(a) of Section 38a(d) and Section NIS 334,620 the Law in 38a(b)(2) or Section 38a(c) conjunction with of the Law ISA directives in accordance with Section 28(b) of the Law 8 Sections 12-13 Sections 38a(b)(1) and NIS 28,000 and 26(a) in 38a(b)(2) or Section 38a(c) conjunction with Section 28(b) of the Law 9 Directives in Item 26, Part A in the NIS 7,500 accordance with Second Addendum and Section 28(b) of Item 5(1) in the Third the Law Addendum to the Law

(ii) The Committee for Financial Sanctions under the Money Laundering Prohibition Law

Following audits conducted in portfolio management companies, in which violations of the Prohibition on Money Laundering Law and orders thereof were discovered, the ISA imposed a fine on one company and another company was invited to a hearing in front of the Financial Sanctions Committee. Fines are collected by the ISA and transferred to the Administrator General for the benefit of a fund established under the Dangerous Drug Order.

Table 23: Violations for which financial sanctions were imposed in 2011 and fine amounts Company Violation for Sections Fine amount Date which violated financial (Prohibition sanction was on Money imposed Laundering Order) 1 Harel Finance Violation of Section 9 NIS 150,000 May 15, 2011 Trade and duty to Securities publish Ltd. irregular report

3. Legislation activity involving the Department In 2011, the Investment Department drafted and promoted bills and legislative amendments as follows: Primary legislation .א During the year, the following laws were published: 1. Corporate Governance Law for Fund Managers and Portfolio Managers (Legislative Amendments) of 2011. The Law was published in the Official Gazette on November 16, 2011 and is to become effective on May 16, 2012. It includes amendments to the Joint Investment Fund Law and Advice Law. Provisions were added to the Joint Investment Law concerning improvement of corporate governance in fund managers, inter alia due to similar amendments made to the Companies Law as regards publicly traded companies. Amended provisions included the following: ensuring trustees’ independence of fund managers; provisions as regards the composition of the board of directors so as to ensure its ability to fulfill its role; the description of the board's roles was extended; a requirement was added to nominate an audit committee, its roles and composition specified; the requirement to obtain the approval of a general meeting of unit holders for a number of special decisions was revoked (such as approval of a CPA and consolidation of funds), etc. In the amendment to the Advice Law, corporate governance provisions which applied to fund managers were also applied to large portfolio managing companies, i.e. – companies with

more than 1,000 clients or companies with more than 50 clients with assets under management valued at over NIS 5 billion as a minimum. 2. The Joint Investment Trust Law (Amendment 14) of 2010 – this amendment requires fund managers to conduct tenders prior to signing an agreement for any brokerage services, the fees for which would be paid out of the assets under their management for transactions in the funds’ assets. The Amendment was published in the Official Gazette on February 16, 2010 and went into effect on December 28, 2011, on the same date in which the rules developed by the ISA on this matter under Sections 69(c)(1) and (f) of the Amendment went into effect. 3. Regulation of Investment Advice, Investment Marketing, and Investment Portfolio Management Services Law (Amendment – Provision of Investment Advice) of 2011. A private bill submitted by MK Amnon Cohen, whose main purpose is to define general investment advice activities and general investment marketing activities, while making a distinction between them and providing “personal” investment advice and marketing services, cancellation of the requirement for a license in order to engage therein and special regulation of these general services. The Department staff also handled the following amendment proposals, which were approved by the ISA Plenum:

1. Joint Investment Trust Law (Amendment 15) of 2010 – the proposed amendment was published in the Official Gazette on May 17, 2010. At this stage, the chapter concerning opening the market to foreign funds was not included in the proposed amendment. Since the initial development of the proposal, material economic changes have taken place in capital markets, which may have ramifications on various areas which are relevant to the Israel Securities Authority in general and particularly to the supervision over mutual funds. For this reason, the ISA intends to re-examine the issue of opening the Israeli market to offerings by foreign mutual funds, so as to ensure that Israeli investors are adequately protected when investing in such funds. 2. Joint Investment Trust Law (Amendment 16) of 2010 (Amendment regarding ETNs) – the proposed amendment was published on November 16, 2010. It concerns the regulation of exchange-traded notes (ETNs) and exchange-traded funds. The proposed amendment is currently at the last stages of reviewing its final version. When completed, it will be submitted as a bill to the approval of the Ministerial Legislation Committee. Subsidiary legislation .ב During the reporting year, the following regulations and rules were approved: (i) Joint Investment Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts) (Amendment) of 2011 – were approved by the Knesset Finance Committee on November 14, 2011; (ii) Joint Investment Trust Regulations (Options, Futures Contracts and Shorts) (Amendment) of 2011 – were approved by the Knesset Finance Committee on November 14, 2011; (iii) Joint Investment Trust Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) (Amendment) of 2011 – were approved by the Knesset Finance Committee on November 14, 2011; (iv) Joint Investment Trust Regulations (Purchase and Sale Prices of Fund Assets and Value of Fund Assets) (Amendment) of 2011 – were approved by the Knesset Finance Committee on November 14, 2011. These regulations are concerned with increasing the number of funds which offer investments in Israeli funds of funds that are not under their management. (v) Joint Investment Trust Regulations (Financial Statements of Mutual Funds) (Amendment) of 2011 – were approved by the Knesset Finance Committee on November 14, 2011; (vi) Joint Investments Trust Rules (Tendering Process and Examining Trading Company Ties with Fund Managers) of 2011 [Kovetz HaTakanot (Collection of Regulations) 7009, page 1099]. In addition, the following proposed regulations and notifications were approved by the ISA Plenum during the reporting year:

(i) Joint Investments Trust Regulations (Redemption Price for ETN Units and Value of ETN Assets and Liabilities for Integrity Testing of ETN Assets) of 2011; (ii) Joint Investments Trust Regulations (Report by a Traded Joint Investment regarding the Results of an Offering and Cancellation of an Offering) (Amendment) of 2011; (iii)Joint Investments Trust Regulations (Backing Account) of 2011; These proposals are part of a move towards regulating ETNs under the Joint Investment Trust Law, in continuation with the proposed amendment concerning ETNs mentioned in Section a above. (iv) Joint Investment Trust Regulations (Reports) (Amendments) of 2011 – these regulations concern extending the reporting on changes in the fees of a fund manager and fund trustee (See Section 4.b above). Above; (v) Notification Regarding Change in Handling Procedures of Requests to Approve Publication of Prospectuses of Joint Investment Trust Funds; 1. Joint Investment Trust Regulations (Participation of Fund Managers in Unit Holders' Meeting and Voting to Approve Special Tender Offer and Approve Transactions with Principal Shareholders) of 2011; 2. Joint Investment Trust Regulations (Reports) (Amendment) of 2011 regarding participation of fund managers in unit holders' meetings and voting to approve special tender offer; 3. Joint Investment Trust Regulations (Details of Trust Fund Prospectus, its Form and Structure) (Amendment) of 2011 regarding participation of fund managers in unit holders' meeting and voting to approve special tender offer; 4. Joint Investment Trust Regulations (Distribution Commission) (Amendment) of 2011 regarding reducing distribution commissions and distribution of foreign funds. In addition, a list of circumstances to test for a fault in the reliability of entities supervised by the ISA in accordance with Section 15(a1) of the Joint Investment Trust Law and in accordance with Section 10(a1)(4) of the Advice Law [was published on the ISA website on December 4, 2011]. For full details, see the Legislation Department chapter.

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.

2. 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, since the application of the administrative enforcement procedures had not yet begun, rendering the violation of the petitioners’ rights remote and theoretical in nature. Thus, the petitions were rejected in limine. See Section 4a of the Legal Counsel chapter. 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 Trust 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. See Section 4a of the Legal Counsel chapter. 4. Civil Case 1689/08 Mulkandov vs. Porush, Terry and the Israel Securities Authority A financial claim filed against the chairman of the ISA at the date of the claim, against the former head of the Mutual Funds Supervision Department (presently part of the Investment Department) and against the ISA. The claim argues for damages and prima facie loss of income due to the termination of a service agreement between a fund manager and the claimant. The claimant alleges that this occurred following action taken by the ISA. The claim was rejected. The Court decided that factually, the Head of the Department conducted a telephone conversation with the Fund Manager, which was one of the reasons for the termination of the service agreement with the claimant. However, the Court accepted the defense’s claims, inter alia since the action was taken as part of the fulfilling the defendants’ supervision roles and as part of their duty to safeguard the interests of investors in mutual funds. Administrative Petition 1113/09 the State of Israel vs. Ram Capital Markets et al. The proceeding involves an appeal filed by the State and an appeal filed by C-Ram Capital Markets Ltd. and Amir Ettinger regarding a decision made in disciplinary complaint no. 2/04 filed against C-Ram, which is a firm licensed for portfolio management, against three officers in the company – two of whom were licensed for portfolio management, and an investment advisor, who served as head of one of the company's branches. The appeals of the respondents were factual in nature and were rejected by the court. The State appealed the leniency of the punishment and the publication of the decision without citing the names of the respondents. The Court decided to refrain from intervening in the sentence handed down by the board, that strikes a balance between the severity of the offenses and the

97 arguments for leniency, which led to a mere reprimand along with a significant fine. Regarding the publication of the decision, the Court decided that although the disciplinary committee took into consideration the respondents' personal circumstances, such circumstances do not justify deviation from the rule whereby legal proceedings are conducted openly. The Court decided that publishing the names of the respondents answers the need to preserve the proper functioning of license holders and serve as a deterrent.

VII Department of Supervision over the Secondary Market The Department of Supervision over the Secondary Market coordinates the supervision and control activities over the proper and fair conduct and trading on the Tel Aviv Stock Exchange and its clearing houses. 1. The Department’s purview Supervision over trading on the Stock Exchange .א The control and supervision of trading on the Stock Exchange are conducted by electronic and other means, in an effort to identify irregular trading activities within and outside the Security Exchange, which may be indicative of violations of the Securities Law. In 2011, the Department developed new algorithms for the purpose of analyzing behavioral irregularities in the BI (Business Intelligence) system. Supervision over the Stock Exchange clearing houses .ב During the reporting year, the Department staff promoted, through cooperation with the Bank of Israel, issues and areas concerning the stability of the Stock Exchange clearing houses and ways to confront failures and emergency situations. In addition, the Department cooperated with the Bank of Israel, the Stock Exchange, Stock Exchange members and entities from the underwriter industry to develop a reform program for the underwriting of public offerings. Supervision over the Stock Exchange Members Department and the Stock .ג Exchange As part of its supervision over the Stock Exchange Members Department and overall supervision of the Stock Exchange, the Department handled various aspects regarding the activity of Stock Exchange members, including stability requirements for Non-bank Stock Exchange Members (hereinafter - NBMs), as well as Disaster Recovery Plan (DRP) aspects of the NBMs' Activity. As part of its ongoing supervision activity, the Department receives from the Stock Exchange ongoing reports regarding irregular member activities, including details about the financial stability of NBMs. Stock Exchange rule making activities .ד 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 changes made in the Stock Exchange rules. In addition, the ISA’s approval is required for any changes in the Rules and Regulations' provisions. For this purpose, the ISA recommended to the Minister of Finance to adopt revisions to the Rules and Regulations initiated by the Stock Exchange, and approved the revisions of its provisions, as follows: (i) January 19, 2011 (1) The ISA approved an amendment of provisions regarding the adjustment of the share price in a new company to interest distribution; (2) The ISA approved the amendment of provisions regarding blocking criteria for securities;

(3) The ISA recommended to the Minister of Finance to revise the Rules and Regulations, while approving the amendment of the provisions regarding the change of the chapter dealing with listing debt certificates of banking entities subject to forced conversion; (4) The ISA recommended to the Minister of Finance to amend the Rules and Regulations regarding options on Shahar government bonds; (5) The ISA recommended to the Minister of Finance to amend the Rules and Regulations regarding conflicts of interests between members of the Stock Exchange and their eligible clients. (ii) March 23, 2011 (1) The ISA approved the amendment of the price list (appended to the Stock Exchange provisions) regarding conveying information of balances of clearing house members’ accounts. (2) The ISA recommended that the Minister of Finance amend the Stock Exchange Rules and Regulations, while simultaneously approving an amendment to the provisions concerning the delisting of securities; (3) The ISA recommended that the Minister of Finance amend the Stock Exchange Rules and Regulations, while approving an amendment to the provisions concerning rules for foreign listed companies (dual-listed companies); (4) The ISA approved the amendment of provisions regarding allowances in listing new companies for trade; (5) The ISA recommended that the Minister of Finance amend the Stock Exchange Rules and Regulations, while approving an amendment to the provisions concerning the definitions of public holdings; (6) The ISA approved the amendment of provisions, including the amendment of the price list (appended to the Stock Exchange provisions) regarding a temporary provision concerning the change in terms and conditions of debt certificates. (7) The ISA recommended the revision of provisions regarding options on additional shares; (8) The ISA approved an amendment to the provisions regarding changes in the methodology of calculating indexes. (iii) July 6, 2011 (1) The ISA approved the amendment of provisions regarding amendments in provisions concerning blockage – changing the definition of a trustee; (2) The ISA approved an amendment regarding a change in the last trading day of a covered warrant; (3) The ISA approved an amendment of provisions regarding the launch of options on Shahar bonds; (4) The ISA approved a price list (appended to the Stock Exchange provisions) regarding market making in options on additional underlying assets; (5) The ISA recommended to the Minister of Finance to amend the Rules and Regulations regarding transition to T+1 clearing in the stock market. (6) The ISA approved an amendment to provisions regarding the last day of trading – transition to T+1 clearing in the stock market. (iv) August 31, 2011

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The ISA approved an amendment to temporary provisions regarding the definition of a limited partnership project for the exploration of petroleum and natural gas. (v) September 20, 2011 (1) The ISA approved an amendment to provisions regarding changing a separate opening trade date; (2) The ISA approved provisions regarding the update of rules for removing shares from indexes due to irregular events; (3) The ISA approved an amendment to provisions regarding market making in options of Shahar debt certificates and ceasing to reward Government bonds market makers; (4) The ISA recommended that the Minister of Finance amend the Stock Exchange Rules and Regulations, while approving an amendment to the provisions concerning eligibility conditions for NBMs; (5) The ISA approved the amendment of provisions regarding blockage conditions; (6) The ISA approved the amendment of provisions regarding a restriction of open positions for options on shares – lapsus calami; (7) The ISA approved the amendment of provisions regarding changes in minimum and maximum sizes of options; (8) The ISA recommended to the Minister of Finance to amend the Rules and Regulations, while approving the amendment of provisions, regarding the adjustment of the provisions of the Second Part of the Rules and Regulations and provisions thereof, for T+1 clearing; (9) The ISA approved temporary provisions regarding the ceasing of trade due to a company event; (10) The ISA approved the amendment of provisions regarding the addition of FOK and IOC orders to securities trading; (11) The ISA recommended that the Minister of Finance amend the Stock Exchange Rules and Regulations, while approving an amendment to the provisions, concerning options on shares – moving from NIS to agorot (NIS cents). (vi) December 12, 2011 (1) The ISA recommended to the Minister of Finance to amend the Rules and Regulations, while approving the amendment of the provisions, regarding unclaimed accounts at NBMs and accounts of deceased NBM clients; (2) The ISA approved temporary provisions regarding foreign securities; (3) The ISA approved the amendment of provisions regarding tenures of external directors at NBMs; (4) The ISA approved the amendment of provisions regarding delay in executing FOK and IOC orders in securities trading; (5) The ISA approved the amendment of provisions regarding maximum value for coverage of financial assets; (6) The ISA approved the amendment of the provisions regarding the extension of the validity of a temporary order regarding a change in the terms and conditions of debt certificates. Own account trading floors .ה

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Towards the end of the past year, the Department assumed responsibility for regulating trading floors. Since then, the Department has been developing regulations regarding own trading floors (hereinafter – trading floors). The Department’s staff, in cooperation with other ISA departments, is working towards the completion of enactment procedures and regulation of this field. In addition, the staff is preparing for the commencement of the supervision and authorization process. 2. Regulation activities The Department developed two additional chapters for the Securities Regulation (Own Account Trading Floors) Draft Bill (hereinafter – the Own Account Regulations), which was submitted to the Finance Committee’s approval during the year. The new chapters deal with the following issues: Minimum capital, liquid assets and insurance requirements. The draft bill (א) being developed requires a minimum capital cushion, which should be higher than the allowances for various risks but not smaller than a minimum set amount. There are also requirements regarding insurance and available liquid funds to be held in the company’s account. The fees payable by companies operating trading floors and companies (ב) wishing to obtain licenses for operating trading floors. It is proposed that fees shall be imposed on requests to obtain a license and amend the terms and conditions of a license. In addition, a variable annual fee is to be imposed, which will change according to the revenues of the company operating the trading floor. In addition, during the year the Department cooperated with other ISA departments in drafting amendments, adjustments and addendi to the Trading Floor Regulations draft, which was submitted to the approval of the finance committee. Such revisions mainly include adjustments and addendi which are required as a result of the new chapters. In addition, the Department continued to develop a draft for a Prohibition on Money Laundering Order for companies licensed to operate trading floors. This project was carried out with the Prohibition on Money Laundering Authority.

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VIII Legal Counsel Department 1. Legal Counsel – responsibilities The Legal Counsel Department has two primary responsibilities: Providing legal counsel concerning the ISA’s operations and supervisory .א powers; .Providing organizational legal counsel .ב 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 or regulation of certain industries or topics, which may apply to all or some supervised entities. These activities include proposed legislation and interpretation of statutory provisions affecting either the entire market, or specific sectors or entities. The Legal Counsel Department also provides legal advice on 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 ISA 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. 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 2011 In the past year, the Legal Counsel Department was involved in key far-reaching ISA initiatives, in which it supported the various ISA departments. These initiatives included the following: Administrative enforcement – Supporting the ISA’s preparations for .א implementing the Streamlining of ISA Enforcement Procedures Law

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(Legislative Amendments) of 2011.32 This refers to both administrative enforcement proceedings, and financial sanction proceedings, including application of the Securities Regulations (Reduction of financial Sanctions), 2011, whereby the ISA may reduce sanctions prescribed under the Sixth Schedule to the Law. Own-account trading floors – The Legal Counsel Department, in conjunction .ב with the Department for the Supervision of the Secondary Market, and the Investment Department’s Financial Instruments Unit, continued promoting the final enactment and application of the Securities Law (Amendment 42) of 2010,33 and the corresponding regulations. This legislation regulates alternative trading floor operations which allow investors to trade with dealers in various financial assets (foreign currency derivatives, indices, commodities, etc.), and brings these operations under ISA supervision. Trustee Law – The Legal Counsel Department supported the Corporate .ג Finance Department in legislating an amendment to the Securities Law and regulations, which regulates bond trustee operations, inter alia, in light of the debt settlement agreements made in the past year.

3. Agenda for the coming year The Legal Counsel Department’s work plan for the coming year includes .א numerous matters which the Department must handle on a daily basis (procedure updates, replying to pre-ruling applications or no-action letters, handling legal proceedings to which the ISA is party, and funding applications for class and derivative actions). :However, the work plan also includes the following matters .ב 1) Regulatory review – In light of the ISA's policy of proportionate regulation, which accounts for cost-effectiveness considerations, the Legal Counsel Department has started to review current regulatory operations. This project seeks to identify opportunities for easing regulations, provided the interests of the investing public are maintained. Among other things, the Legal Counsel Department is considering implementing a regulatory hierarchy, based on a distinction between large and small supervised entities. 2) 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

32 The Amendment went into effect on February 27, 2011. 33 Published on June 15, 2010.

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the means applied by the ISA in Israel, and adopts relevant means so as to maximize legal certainty. 3) Removing barriers to private enforcement – For more information on this matter, see Section 4.b below. 4) Enforcement – Supporting administrative enforcement efforts – In the coming year, the ISA will roll out its administrative enforcement initiative. The Legal Counsel Department provides support for the new enforcement option, and verifies compliance with the provisions of law and the application of proportionate enforcement policies. Financial sanctions – The administrative enforcement amendments introduced two material changes to the Law concerning financial sanctions. First – a significant increase in sanctions. And second – enactment of the Reduction Regulations which grant the ISA discretion in reducing fines. The Legal Counsel Department handles various questions concerning the application of this enforcement measure. 5) 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 in 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 system; submitting the ETN market to regulation under the Joint Investments Trust Law.

4. 2011 highlights Coordinating and supporting civil suits .א The ISA is party to several civil suits. In general, the State Attorney’s Office represents the ISA in court, and 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.

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) Stock Exchange 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) of 2011, 105

concerning administrative enforcement, three administrative petitions were filed for a conditional order. These petitions relate to provisions prescribed in the aforesaid Law, mainly those prohibiting indemnification and insurance, the appeals process prescribed by the Law, and the financial sanctions mechanism. The three petitions where heard together, and on February 5, 2012, the Hon. Deputy-President A. Rivlin handed down the court's decision in the case. The court decided that, 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 Trust Law. The amendment concerning the publication of prospectuses covers in the press and was enacted following a private bill passed in the Knesset against the ISA’s recommendations. The petition presents various objections to this amendment, including that it undermines the constitutional rights of fund managers, that it does not serve a worthy purpose, and that it is not sufficiently proportionate. The petition is scheduled to be heard on October 10, 2012. Actions concerning civil fines and financial sanctions under the Joint Investments Law, the Advice Law, the Prohibition of Money Laundering Law, and the Securities Law As part of an administrative petition, both the State and the respondents appealed a decision given in a disciplinary proceeding. A disciplinary complaint was filed against a licensed portfolio management company, three of its officers (two of which were licensed portfolio managers), and an investment advisor who served as a branch manager in the company. The respondents’ appeals, which were primarily factual in nature, were all dismissed by the Court. The State appealed the leniency of the punishment, and the publication of the decision without mention of the respondents' names. The Court decided not to intervene in the punishment imposed by the committee, which balanced the severity of the violations and the grounds for leniency, and consequently sufficed with a reprimand without significant fines. As regards publication of the decision, the Court ruled that, even though the disciplinary committee took into consideration the respondents’ personal circumstances, these circumstances do not justify a deviation from public judicial process. Publication and mention of the respondents’ names upholds proper conduct by license holders, and deters others from breaking the law (Administrative Petition 1113/09). 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.

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deals in investment marketing, advice and management, and does not adequately disclose to its clients the risks involved in those investments that it promotes. 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 but does not disclose such fact. 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. As of the end of the reporting year, the ISA has yet to submit its response in this case. 2) Derivative Action 38472-06-10 Shohet Rabinovitch, CPAs vs. Dor Alon Energy in Israel (1988) Ltd. et al. The case involves a class action and a derivative action filed against Dor Alon Energy in Israel (1988) Ltd. (hereinafter – Dor Alon) and others. The action pertains to a dividend in kind distributed by Dor Alon to shareholders in its investee Alon Natural Gas Exploration Ltd. According to the application for approval, Dor Alon performed a prohibited distribution, in violation of the Companies Law and the terms of Dor Alon’s bonds. The parties have filed all court documents required for application for approval as a class action, and the evidence stage of the approval process commenced in the reporting year. In the evidence hearing which took place on October 4, 2011, the Court requested the ISA’s position on “how to determine the value of the dividend in kind for the purpose of a distribution under the Companies Law. Should it be measured as per the equity method or according to its real value on the distribution date". The ISA submitted its opinion in this matter on November 20, 2011. 3) Class Action 21842-08-11 Gilat vs. Menora Mivtachim Holdings Ltd. et al. The case refers to a class action filed against Menora Mivtachim Holdings Ltd. (hereinafter – Menora), companies under its control (hereinafter – the Menora Group), and officers in those companies. According to the application for approval, the Menora Group erred in managing a certain incident attributed to officers in the Menora Group. In so doing, the Menora Group caused a drop in its share price, and damaged its shareholders. In a hearing which took place on September 13, 2011, the Court decided to include the ISA in the proceeding and allow the ISA to submit its response, if it so wishes, by February 15, 2012. As of the end of the reporting year, the ISA has yet to submit its response in this case. 4) 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 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 of

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1995, by charging group members higher fees than prescribed 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. 5) Class Action 26809-01-11 Kahana vs. Makhteshim Agan Industries Ltd. and Koor Industries Ltd. This case refers to a class action filed in connection with Makhteshim Agan Industries Ltd.’s merger with a subsidiary of the China National Chemical Corporation. This action ended in a court-approved settlement. An application was subsequently filed with the Court for instructions concerning trustee fees payable in connection with the settlement agreement’s implementation. The ISA was requested to submit its opinion on this application. The ISA stated that a professional entity may be appointed as trustee for implementing the settlement agreement – instead of the proposed trustees. Such appointment would save hundreds of thousands of dollars for group members. The Court accepted the ISA’s position. 6) Derivative Action 54280-01-11 Daniel Ben Shitrit vs. Israel Borovitz et. al. The case refers to an application for approval as a derivative action, filed in connection with salaries paid to the CEO of El Al Israel Airlines Ltd. The parties to this action reached a settlement agreement, on which the Court requested the ISA’s opinion. The ISA stated that it does not deem it necessary to intervene in the settlement agreement, including in the details pertaining to the derivative plaintiff’s remuneration for his attorneys' fees. Civil Actions Against the ISA 1) Civil Action 1689/08 Molkendov vs. Porush, Terry and the ISA A financial claim filed against the ISA, its former chairman and the former Head of the Mutual Funds Supervision Department (presently 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 awarded their claimed defenses. As such, the Court rejected the claim. 2) Civil Action 27603-12-11 Abramovitch David et al. vs. the ISA and the Israel Police This case refers to a monetary claim filed against the Israel Police and the ISA, in connection with fraud carried out by Mr. Gregory Lerner. The action was filed by 272 citizens. According to the statement of claim, approximately

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2,500 citizens lost NIS 62 million in the fraud. The statement of claim further argues 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 damages. The case is still in its initial stages, and as of the end of the reporting date, a statement of defense has yet to be submitted. 3) Originating Motion 20965-08-11 Semana vs. Y. Arnon & Co. et al. This case refers to an originating motion for declaratory relief against a number of defendants, including the ISA. As regards 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. The originating motion is scheduled to be heard after the end of the reporting year. 4) Civil Action 1529-06-11 Nahum Lieberman vs. Direct Capital Ltd. et al. A monetary claim filed against a number of respondents, including the ISA. The case refers to a rights issue carried out by Direct Capital Ltd. According to the statement of claim, the price at which the rights were issued caused the plaintiff to incur damages. The statement of claim argues that the ISA was negligent in exercising its professional judgment by approving the issue prospectus. The ISA submitted its statement of defense. The parties subsequently agreed to strike the ISA from the statement of claim, and on December 14, 2011, the Court ordered that the ISA be stricken from the claim. 5) Liquidation Case 39024-12-10 Eric Safran et al. vs. Hatehof Ltd. et al. (Application 72) As part of a debt settlement reached with Hatehof Ltd., several of its shareholders filed a claim against the company’s trustee, who was under stay of proceedings. The shareholders argued that the trustee was responsible for the fact that, for two days following approval of the company’s settlement agreement, the company's shares were still being traded on the Stock Exchange. This completely devalued the shareholders’ holdings, and consequently any person who bought shares in the company during that period lost their money. This application did not include any request for relief against the ISA. However, the ISA was required to submit its response, which was submitted in September 201. The case was subsequently settled later in the reporting year. Funding of class and derivative actions and removal of barriers .ב to private enforcement 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

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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 of 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 should be noted that this is a new power, granted the ISA in the present reporting year under Amendment 16E to the Companies Law. As of the end of the reporting year, the ISA has yet to exercise this new right to provide funding for derivative actions. The ISA exercises its powers to fund class and derivative actions as part of its ongoing operations. Actions receiving funding from the ISA are detailed below. It should be noted that recently, 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. 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. For more information on this project, see Section b.3 of the Legislation Department chapter.

The following are class and derivative actions handled during the reporting year. Class actions receiving financial support from the ISA which ended in the reporting year In the reporting year, one ISA-supported class action was resolved (the class action against the Israel Trade Bank et al. (Civil Claim 1521/02, Civil Appeal 10927/02). For more information, see the ISA's 2010 annual report, page 149, Section 4(c). Pending class actions supported by the ISA 1) Class action against Reichert Industries Ltd. et al. On June 7, 2007, the Supreme Court ruled on the appeal filed by the class action plaintiff and the appeal filed by Mr. Dan Reichert (hereinafter – Reichert) against the District Court's ruling (hereinafter – the Supreme Court Ruling). The Supreme Court Ruling outlined principles defining the term "controlling shareholder" for accountability purposes. The Supreme Court reaffirmed the district court’s decision that Mr. Reichert was indeed

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a "controlling shareholder" in the company and therefore indirectly accountable for the damages sustained by the plaintiffs. The Supreme Court Ruling presented various methods for calculating damages due in the class action, and determined that, in this case, the appropriate method is the "out of pocket" method. This method is based on the damages principles prescribed under tort law – restoration of the status quo ante. At the start of the reporting year, the Hon. Judge Dr. Michal Agmon-Gonen issued the District Court's decision in the case (hereinafter – the District Court Ruling). The District Court Ruling determined that the fraud's effect on the price of the relevant securities is reflected through the change in their prices soon after the fraud was uncovered. The Judge examined the share price in the days prior to the arrests and the publication of the fraud, and compared it to the share price in the days following the publication. The difference between the share prices reflects the effects of the fraud on the price of the relevant securities, assuming a non-perfect market where the price of the fraud prior to its publication is not embodied in the share price. Therefore, the Judge decided that the damage to each plaintiff equals the number of securities held by that plaintiff multiplied by the difference between the share price prior to the fraud's publication and its price soon after publication. The Judge charged the respondents, Reichert and Mr. Menashe Cohen, with damages according to the Supreme Court Ruling, according to their relative involvement in the fraud. Total damages amounted to NIS 9,043,384 plus linkage and interest as required by law from the date of the fraud's discovery and until such time as payment has been made in full. Remuneration to the class plaintiff was set at NIS 400,000, and fees to the class plaintiff's representative were set at NIS 1,300,000. The class plaintiff appealed the manner in which the out of pocket method was applied in the District Court Ruling, and the fees ruled to the class plaintiff's representative. The appeal was heard on March 29, 2011, and the parties reached a settlement concerning the amount of compensation to be paid. A decision has yet to be handed down concerning the fees ruled to the class plaintiff’s representative. Civil Claim 1134/95, Civil Appeal Applications 8268/96, 8377/96, and 8332/96, Civil Appeal 2046/10). 2) Class action against Elscint Ltd. On December 14, 2006, the Supreme Court accepted an appeal to overturn the District Court's decision to deny an application dated August 16, 2000,34 to classify the suit as a class action. The application to classify the suit as a class action was re-submitted to the Haifa District Court, due to the time that had elapsed and in light of the Class Action Law of 2006 (hereinafter – the Class Action Law). The application for approval as a

34 Civil Appeal Application 7028/00 IBI Mutual Fund Management (1978) Ltd. vs. Elscint Ltd. et al., Takdin – Supreme Court Rulings 2006(4) 4102.

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class action was heard in the second half of 2007, and in January of 2009 the Court decided to deny the request to approve the suit as a class action. The main reasons for denying the request were as follows: (a) The Court determined that the claim contained a number of discriminatory events, therefore – the members of the potential group as defined in the application do not constitute a homogeneous group as required under Section 4 of the Class Action Law, according to which one may only file a class action on behalf of a group if that person has grounds for a claim that raises material factual and legal questions which concern all members of the group. Since the claim concerns a number of events and members who purchased shares at different dates, only some of the events are relevant to group members and the material factual and legal questions are not common to all group members. The Court added that it is authorized, according to Section 10(c) of the Class Action Law, to define a sub-group if it finds that some factual or legal questions may not be common to all group members. However, the Court decided not to do so, since there was no mention of the possibility in the statements of claim filed by the plaintiffs. The Court stated that a single event raised questions common to all members of the group – an acquisition of hospitality operations and rights in a commercial and entertainment center project in the Herzlyia Marina (later known as the Arena Mall) by Elscint Ltd. of the Europe Israel Group in September 1999 (hereinafter – the Elscint Europe Israel Transaction). (b) Regarding the Elscint Europe Israel Transaction, the Court determined that the plaintiffs have a basis for personal claims insofar that Elscint sustained damages from the transaction, since the grounds for the claim arise from the fact that the damages sustained by public shareholders were higher than the damages sustained by the controlling shareholder, as the assets purchased by Elscint in the transaction were those of the controlling shareholder. This ruling is based on case precedent established in the Magen VeKeshet case,35 whereby: The rule is that when a shareholder sustains losses independent of the damages sustained by the company, he has grounds for a personal claim, independent of the company. However, typically, when the damage to shareholders is caused by a decrease in the value of the company and its shares and all shareholders are equally affected, there are no grounds for a personal claim. This constitutes secondary damage, which reflects damages sustained by the company. There are a few exceptions to this rule, including – damage sustained due to a breach of a contractual right of a shareholder as such, or when the damage sustained by a shareholder or a group of shareholders is different from the damage sustained by another group of shareholders, or due to minority discrimination...

35 Civil Appeal 1967/95 Magen VeKeshet Ltd. vs. Tempo Beer Industries et al, Supreme Court Ruling 51(2) 312, 326.

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Despite the Court's determination that the Elscint Europe Israel Transaction may give rise to unique damages which raise grounds for a personal claim, as regards another component in the claim the plaintiffs did not prove, prima facie, that they indeed sustained any damages as required under Section 4(b)(1) of the Class Action Law. In 2009, an appeal was filed with the Supreme Court. The appeal contests the lower instance court's decision as aforesaid. On December 18, 2010, the Supreme Court heard the appeal. The appeal is still pending decision (Civil Claim 1318/99, Miscellaneous Civil Application 10029/99). 3) Class action against Bolos Travel and Hotels Ltd. et al (hereinafter – the Company) The case, 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 defendant's 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 offenses with which the Company was charged. The Judge decided that there is no sense in including the incriminating ruling given against parties in the case, as the 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 wrongs they commit, and in any case directors do not bear an "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 does not have any "legal affinity" to the directors, and they each have different interests. The class plaintiff's representatives filed an application to appeal these rulings with the Supreme Court. On February 14, 2010, the Supreme Court rejected the application for appeal.

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In 2010, the evidence stage of the application for approval as class action reached its conclusion, and the parties submitted their summations. In March 2011, the Court partially granted the application. The application was approved 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 as a class action that were denied. The appeal has yet to be heard (Civil Claim 1934/02). 4) Class action against Kital International Holdings and Development Ltd. and Levi Kushner The case concerns a request for valuation relief under Section 338 of the Companies Law. After the District Court approved the suit as a class action and determined that the basis for calculating the fair value of the Company's shares is its real economic value at the time the purchase offer was submitted, and not its market capitalization, the respondents filed an appeal with the Supreme Court. The plaintiff agreed that the application for appeal be heard as an appeal. The parties submitted their summations, and the litigants were requested to submit their positions regarding the implications the ruling given in Civil Case 10406/06 Atzmon v. Bank Hapoalim, where the Supreme Court made precedential decisions concerning the fair value valuation of shares in valuation relief actions. A hearing in the case was also held in the Supreme Court. In light of the importance of the matter, the Supreme Court judges requested and received approval to expand the panel to seven judges. The Supreme Court was scheduled to hear the case in April 2011 in an expanded panel. However, this hearing has been indefinitely postponed (Civil Appeal Application 779/06, Civil Claim 2338/02, Miscellaneous Civil Application 20012). 5) Class action against Dor Chemicals et al. The case pertains mainly to 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 (Civil Claim 1185/05). 6) 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 filed its initial public offering with the Stock Exchange, its prospectus stated that it deals in dental instrumentation. The parties submitted all their pleadings in the case to the Court, along with expert opinions. The Court appointed an expert on its behalf. On December 15, 2010, a hearing was held in this case, in which the Court's expert was questioned. In the reporting year, additional

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hearings were held in the evidence stage of the case (most recently on September 26, 2011). Completion of the evidence stage was postponed pending testimony by some of the respondents in the related criminal proceedings (Civil Claim 1420/07). 7) 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. (hereinafter – 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 those 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 presented, the Company's securities would never have been offered to the public under a prospectus and listed on the Stock Exchange. or alternatively – they would have been offered to the public, purchased by group members, and traded on the Stock Exchange at significantly lower prices. The respondents filed their responses to the application, and the class plaintiffs subsequently filed their reply. As part of proceedings in this suit, the respondents requested that the application for approval as a class action be rejected out of hand. In the request for rejection out of hand, 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 avenue for resolving the claim, and that damages of these amounts call for a personal claim being filed and not a class action, which is an exceptional tool to be used only when personal claims are not practical or effective. On October 3, 2010, the Court rejected this argument. The Court stated that "Both as a matter of legal principal and as a matter of legal practice, there are cases in which a suit may be approved as a class action at the request of those who have not been significantly damaged. This applies as a general principle, but particularly applies in the case at hand in an institutional investor's application for approval of a securities 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, and the application for approval as a class action is now pending decision (Class Action 14144-05-09). 8) Class action against Standard & Poor’s Maalot Ltd. et al.

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This claim was filed against Standard and Poor's Maalot Ltd. (hereinafter – Maalot), World Currencies Ltd. and several of its officers and controlling shareholders, and against the Trust Company of Bank Leumi Le-Israel Ltd. (hereinafter – the Trustee). The suit concerns asset-back bonds offered to the public by World Currencies under a prospectus dated February 2006 (hereinafter – the Prospectus). These bonds were backed by notes issued by to banks to World Currencies. The first bank was Lehman Brothers Bankhaus AG – a German bank which is a subsidiary of Lehman Holdings (hereinafter – Lehman Germany). A significant percent of the bonds were backed by this bank. Lehman Holdings fully guaranteed Lehman Germany's obligations for the underlying asset. The other underlying assets were backed by BNP Paribas. 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. On that day, the bonds value dropped by 44%. The following day, the bonds were 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 – World Currencies – greatly delayed its disclosure to the public of the underlying banks; that Maalot committed to regularly monitoring its rating and to update the rating as necessary, and that 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 subsequently 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 subsequent to the reporting year. The evidence stage of this case is expected to be heard in September-October 2012 (Class Action 1383-09). 9) Class action against Standard & Poor’s Maalot Ltd. et al. The claim was filed against Standard & Poor’s Maalot Ltd. (hereinafter – Maalot), Keshet Debentures Ltd. (hereinafter – Keshet), its directors and shareholders, and the bondholders’ trustee (hereinafter – Trustee). The claim 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 (hereinafter – Lehman Germany). These debt certificates were used to back Keshet's bonds (hereinafter – the Notes). Receipts on these Notes served as the sole source of financing for Keshet’s liabilities towards its bondholders.

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Lehman Germany committed to paying Keshet current payments of interest and principal, so long as the conditions releasing Lehman Germany from its commitment were not met. These conditions included: (a) a credit event in Lehman Germany; (b) credit events in a certain number of the 100 companies in a synthetic basket portfolio built according to predetermined specifications agreed upon by Keshet and the backing bank. Lehman Germany’s commitment served as the sole source of income for repaying Keshet’s liabilities towards its bondholders. The Lehman Brothers Group (hereinafter – Lehman) guaranteed Lehman Germany’s commitment. The prospectus included a rating review by Maalot, which gave the bond a temporary rating of AAA. On August 15, 2005, the bond was granted a final AAA rating. On May 24, 2007, the bond was downgraded to an AA+ rating, following the Notes’ downgrade from an A to A- rating. The bond rating remained AA+ right up until the collapse of the Lehman Group in September 2008. In all, NIS 285 million par value in bonds were traded on the market. On September 15, 2008, Lehman announced that it was filing for bankruptcy. That same evening, Keshet announced Lehman's bankruptcy application, and that an order was issued to Lehman Germany to cease its payments to Keshet. As a result, the bond price fell instantly from NIS 0.75 to NIS 0.40. To date 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), indicating complete insolvency and inability meet principal and interest payments on the bonds. The plaintiffs filed suit 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 all indicated the deteriorating condition of the Lehman Group, and included: mass layoffs; closing of mortgage divisions; downsizing mortgage operations; announcement of massive quarterly losses; executive layoffs; a downgrading of Lehman's rating outlook; a downgrading of Lehman and Lehman Germany's credit rating; a sharp drop in Lehman's share price. The plaintiffs argue that Keshet did not update its bondholders on these developments, even though they mandated disclosure as investment- critical data. In so doing, Keshet violated its disclosure duties. The plaintiffs 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 plaintiffs argue that Keshet was negligent towards its bondholders, fraudulent, violated its statutory duties, violated its agreement with its investors, and acted towards them in bad faith. The plaintiffs argue that Maalot, the Trustee and Keshet also failed in rating the bonds. The bonds' issue prospectus included a rating review by

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Maalot, which granted the bonds a AAA rating. On May 24, 2007, this rating was downgraded to AA+. This rating remained in effect through September 17, 2008, at which time it was suddenly downgraded to D. The plaintiffs argue that Maalot violated its obligation under the prospectus and in other representations to assess the risk for insolvency, to closely monitor any changes that may affect Keshet’s ability to repay the bonds, and update the credit rating accordingly. The plaintiffs argue that the rating was not changed although there were grave indications concerning Lehman's deteriorating condition. The plaintiffs argue that Maalot is guilty of both negligent and fraudulent conduct towards investors. The plaintiffs argue that the Trustee failed to notify bondholders of Lehman's deteriorating condition and its implications. The Trustee also failed to demand that Keshet take action to secure its liabilities towards its bondholders. Therefore, the plaintiffs argue, the Trustee violated its duties under Section 25H of the Securities Law and under trustee laws. In October 2011, the plaintiffs filed an application to submit economic expert opinions given on their behalf. The Court accepted this application subsequent to the reporting date (Civil Claim 1611/09, Civil Claim 1697/09). Tenders and contracts .ג As a statutory corporation, the ISA is subject to the Tenders Law of 1992, and regulations. In the past year, according to its aforesaid duties, the ISA issued 19 on various matters, including: information systems; leasing services; legal advice on labor laws; ongoing management 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. Public inquiries .ד In the reporting year, the ISA handled 1,073 public inquiries, as compared to 1,027 inquiries in 2010. 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 various parties to the ISA; various media representatives, such as journalists, students, research institutes and lobbies requesting information, research and data on the capital market; persons undergoing licensing as investment advisors, investment marketers and portfolio managers. Public inquiries concern a broad range of topics. The main issues raised in public inquiries in the past year 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

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investigating suspected wrongdoing in Stock Exchange trading; broad- reaching issues concerning mutual fund and ETN operations; requests for information on the ISA or on 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 of 1998. Report by the Freedom of Information Officer .ה In the reporting year, the ISA received four requests for information according to the Freedom of Information Law, 1998 (compared with three requests in 2010). Two requests were granted in full. One request was found to be redundant, as the applicant received the requested information through another channel. Another request was denied, as it did not request "information" as defined in the Freedom of Information Law. It should be 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.

Contact Details .ו 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]

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IX Legislation Department E. General As detailed in this report, the ISA is responsible for supervising and regulating various activities on the capital market, encompassing numerous market players such as public companies, investment advisors, portfolio managers, mutual funds, underwriters, and the Tel Aviv Stock Exchange (hereinafter – the Stock Exchange). Additional activities are planned to come under the ISA’s supervision and regulation in the near future, such as rating agency operations, trading floors, broker-dealers, and custodians. In September 2011, the increasing scope of the ISA’s regulatory responsibilities, and the work required to promote market regulation, lead the ISA Chairman to announce the establishment of a legislative department in the ISA. The Legislation Department spearheads the ISA’s numerous and varied legislative initiatives, while complying with generally accepted standards from around the world and the principles of balanced and proportionate regulation. The Legislation Department focuses on deterrence and increasing discipline in the capital market, while weighing cost considerations (reflected in time, resource and personnel requirements) 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. As part of its responsibilities, the Legislation Department is charged with leading and promoting legislation pertaining to the ISA’s operations in general or to its various departments (such as legislation governing the ISA’s powers – including its investigatory, supervisory, enforcement and administrative rule setting powers; legislation governing civil enforcement on 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 Legislation Department continuously reviews legislative developments from around the world and, when necessary, acts to adopt relevant ISA-approved regulations 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. The Legislation Department’s activities aim to advance the capital market and guarantee its proper function, so as to open the market to additional players or new instruments, and remove any barriers created by existing legislation. 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 the preferred regulatory model and promote its enactment into law.

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The Legislation Department is also responsible for promoting legislative amendments, supporting them until their final and binding enactment. As part of these activities, the Legislation Department regularly liaises 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 diverse and expansive legislative experience accumulated by its staff, allow the Legislation Department to oversee regulatory knowledge retention in the ISA. Concurrently, the Legislation Department assists the ISA in interpreting new regulations, and spearheads internal training pertaining to key developments in existing regulation. In addition to the above, private or government bills are proposed from time to time, which directly affect 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 is charged with 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. F. Special projects in 2011 b.1 Administrative enforcement – primary legislation, supplementary regulatory instruments, and implementation On January 27, 2011, the Streamlining ISA Enforcement Procedures Law (Legislative Amendments) of 2011 (hereinafter – Administrative Enforcement Law) was published in the Official Gazette, following its approval by the Knesset on its second and third readings. The Law’s publication was the final step in a long series of actions initiated by the Legislation Department to formulate the regulatory framework set forth in the Law, to draft the Law, and to promote its legislation through the relevant persons in the government ministries. These activities were carried out in coordination with supervised entities, the Israel Bar Association, and other bodies, until the Law’s final approval by the Knesset Finance Committee and enactment following its second and third readings.

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The Law includes several legislative amendments, primarily to the three laws whose implementation is overseen by the ISA – the Securities Law, the Advice Law, and the Joint Investments Law. The Law also included amendments to additional legislation as follows: The Companies Law of 1999 (hereinafter – the Companies Law); the Courts Law (Amendment 59) of 2010; and the Securities Law (Amendment 42) of 2010 (hereinafter – the Trading Floors Law). The Administrative Enforcement Law prescribes differential effective dates for its extensive amendments, and stipulates that the bulk of its regulation is contingent on various supplementary procedures, such as enactment of regulations, judiciary procedures, etc. The new regulatory framework adds to the basic administrative enforcement powers granted the ISA prior to the amendment (imposing “straightforward” financial sanctions). In fact, the legislative amendment creates an entire network of enforcement tools for dealing with violations of varying severity and complexity. This network of enforcement tools now includes: criminal enforcement; applying financial sanctions to all supervised entities – companies and individuals; ”expansive” administrative enforcement implemented through special administrative enforcement committees established pursuant to the Law, and allowing the ISA to impose a range of sanctions (including significant financial sanctions and suspension of licenses and officers for specific periods of time); and finally – signing enforcement settlement agreements with violators. The legislative amendment established the administrative enforcement mechanism and the enforcement settlement option, and improved the ISA’S existing capabilities for imposing financial sanctions and initiating criminal enforcement proceedings. It specified procedure, identified decision makers in each node in the decision-making process, applied restrictions on migrating from one enforcement channel to another, established the right to hearing, limitation periods, possible enforcement options, appeal of administrative decisions, etc.

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In effect, this is the first comprehensive and detailed model established in Israeli law, despite prior legislation which mainly granted authority to impose fines. Since its enactment, numerous other regulatory legislative amendments have followed suit, mutatis mutandis (including the amendment set forth for entities supervised by the Ministry of Finance Capital Market Division, and the upcoming amendment for entities supervised by the Antitrust Authority). In the past year, the Legislation Department invested significant resources in completing the various processes required to implement the Administrative Enforcement Law. As of the end of the reporting year, the bulk of these processes have been completed. Thus, the ISA has laid down the legislative groundwork for implementing the various arrangements set forth in the Administrative Enforcement Law. Among other things, the Legislation Department has formulated and promoted regulations for reducing financial sanctions (published on February 17, 2011); regulations covering remuneration and expenses for members of the Administrative Enforcement Committee (published on September 26, 2011) (for more information on these regulations, please see Sections c.2.e and c.2.l below); a list of circumstances warranting examination of the reliability of ISA-supervised entities (published on December 4, 2011) (for more information on this matter, please see Section b.2 below). The Legislation Department also participated in formulating recommended judiciary procedures for the Administrative Enforcement Committee. A final draft of these procedures was submitted to the committee members for approval (the procedures adopted by the committee were published in the Official Gazette and went into effect on January 2, 2012). Furthermore, the Legislation Department formulated internal ISA procedures for implementing the new arrangement (please see below). During the year, the ISA appointed the members of its Administrative Enforcement Committee, and published the procedures governing the Committee’s judiciary process. Following these developments, administrative enforcement is now underway, operating in its new, expansive format. The Law is expected to change the enforcement mechanism prescribed under securities laws, by providing the ISA with more adequate and balanced tools for enforcing those laws with which it is entrusted. Already, even prior to full implementation of the Law, a shift is noticeable among supervised entities. This shift is most evidently reflected in the establishment of internal enforcement programs as a direct result of the Administrative Enforcement Law. For more information on administrative enforcement, please see Section c.1.a below.

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In addition to laying the groundwork for administrative enforcement, the Legislation Department acted to implement regulations, both internally within the ISA, and with third-party entities. As part of these efforts, in 2011, the Legislation Department conducted internal training seminars and presentations for third-party entities, which presented the ISA's approach in implementing the new administrative enforcement legislation. These activities also sought to provide answers to issues and questions raised by various entities. In light of the fact that the mechanism prescribed by the new Law is the first of its kind in Israel, numerous questions were raised concerning its implementation. The Legislation Department’s internal seminars were adapted to meet the various unique needs and challenges of the various ISA departments, including the Corporate Finance Department, the Investment Department, and the Investigations and Intelligence Department. The Legislation Department took part in drafting work procedures and leading the processes required to implement the new arrangement. In the coming year, the Legislation Department is expected to formulate and promote additional regulatory amendments in connection with the aforesaid. These include, for example, amendments to the Administrative Enforcement Law which were already found to be necessary at the initial roll-out stage; issues requiring various changes (e.g., providing the ISA with more leeway in exercising judgment and allowing for more significant reductions of simple fines than currently permitted). Furthermore, the Legislation Department is expected to complete the development and publication of additional secondary regulatory instruments – regulations specifying the compensation model for persons damaged by violations, thereby allowing the Administrative Enforcement Committee to finalize this enforcement tool. Another instrument is a list of rules concerning the duty of care and fiduciary duty, which the ISA has been authorized to prescribe. This list will specify actions and omissions which constitute violations for some of the supervised entities. b.2 Reliability A list of circumstances warranting examination of a supervised entity's reliability was published on the ISA website, and went into effect on January 2, 2012, thirty days after publication. A reference was published in the Official Gazette – Compendium 5772, page 1729. As part of the ISA's regulatory activities, it examines whether supervised entities or entities applying for operating permits (hereinafter – permit) are fit and proper. This examination is conducted either by reviewing whether the applicant or entity themselves comply with relevant requirements, or by reviewing whether the requirements are met by other, related entities, such as permitted controlling holders, officers, etc. Operating permits issued for the capital market – fund manager certification, trustees, permits for holding means of control, etc. – grant their holders various powers and duties whose exercise or compliance is paramount to both active and passive investors in securities. Therefore, in addition to the administrative enforcement mechanism, the Administrative Enforcement Law included

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additional amendments, which aim to provide enhanced protection for investors in securities, unit holders in mutual funds, and clients of permit holders. Among other things, the ISA is authorized to examine an applicant's reliability prior to granting an operating permit, as per its own discretion. The reliability test seeks to provide the ISA with additional tools to prevent public funds being entrusted in unworthy hands, while adapting these tools to generally accepted practices for similar entities in Israel and abroad. However, in revoking permits, the ISA operates based on a list of circumstances indicating a lapse in reliability. These circumstances constitute a pre-requisite for permit revocation. Therefore, the ISA must specify and publish the list of circumstances. Publication of this list is intended to clarify how the ISA exercises its judgment in cases where a supervised entity is suspected of a lapse in reliability. During the year, the Legislation Department worked to formulate its “Reliability List”. Although authority to formulate, publish and update the list was granted exclusively to the ISA, it was formulated in conjunction and in dialogue with various capital market players, while considering a list of common tests. This list of tests was formulated by the Supervision of Banks Authority, the Ministry of Finance’s Capital Market Insurance and Savings Division, and the ISA, in conjunction with the Deputy Attorney General for fiscal and economic matters), and published on the various supervisory bodies’ websites in late 2010. For a list 36 of the common tests, please see the Ministry of Justice website. It should be noted that, currently, reliability testing is conducted for the following supervised entities: fund managers; fund trustees; license holders under the Advice Law, and controlling shareholders and officers therein or in entities holding a control permit for fund managers or officers therein. Legislative amendments which have yet to be finalized or which have yet to come into force include an expanded list of entities for which reliability testing is to be applied. These include companies managing trading floors, debt certificate trustees and underwriters (and controlling shareholders and officers therein or in the aforesaid entities). In 2012, the ISA plans to implement the new regulatory arrangement when granting permits, and to examine possible permit revocation where necessary. b.3 Improving civil enforcement in Israel – promoting an in-depth review of the matter, in preparation for policy changes and regulatory updates The ISA gives much weight to proper private enforcement of securities laws (including: the Securities Law, the Advice Law, and the Joint Investments Law) and corporate laws. Private enforcement is a significant aspect of enforcing these laws, and is of particular importance to the proper function of the capital market in Israel. However, such enforcement is currently weak and lacking. This is reflected, inter alia, in the very low number of securities-related class actions, the small number of derivative claims, and a virtually total aversion of

36 http://www.justice.gov.il/NR/exeres/EE8DA9E4-7FD9-48DF-8A31-7FD624F9F597.htm.

125 institutional investors from serving as class action plaintiffs, or generally getting involved with claims in these matters. This raised the need to remove barriers and improve current conditions as regards private enforcement of securities and corporate legislation. In the past year, the Legislation Department conducted a comprehensive review of the matter, mapped existing shortcomings, and proposed possible solutions. These activities were carried out in collaboration with the Legal Counsel Department’s funding supervisor for class actions and derivative suits. Activities included numerous meetings, so as to recruit all potentially relevant persons to the initiative. In examining possible actions, the Legislation Department found that, even using currently available tools (such as the ISA’s authority to fund class actions and derivative suits), the ISA can take action and effect a certain change in this field. As such, an additional page was added to the ISA website concerning class actions and derivative suits; ISA bulletins were published concerning funding applications for class actions and concerning the ISA’s contacts with applicants requesting funding for class actions; and more. For more information on this matter, please see the Legal Counsel chapter. However, it seems that these actions are insufficient, and additional measures will be required. At this stage, preliminary recommendations have been submitted for the ISA Chairman’s review. In early 2012, the ISA plans to publish a call for proposals on this matter, and initiate round table discussions whereby the general public and supervised entities will be given the opportunity to voice their opinions and present their proposals. These upcoming activities will constitute a significant hearing process for this important initiative. The ISA expects this process to lead to actionable results in 2012. However, it already seems that, on some levels, the ISA will be able to lead changes through its current powers, without need for legislative amendments. In other aspects, it is reasonable to assume that legislative amendments will be necessary. Moreover, some of the changes will require collaboration with other bodies, which was already established in the initial mapping stages of the project (primarily with the Ministry of Justice, the Ministry of Finance Capital Market Division, and the Antitrust Authority). b.4 Trading floors – finalizing the regulatory framework In addition to supervised trading activities on the Tel Aviv Stock Exchange, additional over-the-counter (hereinafter – 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. Recent years have seen dramatic growth in these activities, which until now were unregulated and unsupervised. Regulation is to be implemented on several levels, and will include requirements governing stability, permitted leveraging ratios in operations, information which trading floors must disclose to clients,

126 client recruitment methods, examination of client suitability to floor activities, etc. Regulating these floors is important, as in many cases the traded instruments, while designed for sophisticated clients, are also offered to those with only limited financial understanding, while emphasizing the tremendous potential gain derived from their high leveraging ratios. These investors often expose their investment to substantial risk through their inability to make informed decisions concerning potential risks. Furthermore, since the way in which these trading floors manage client funds is currently unsupervised, there is concern that these monies are not properly managed, and that clients wishing to cease trading on the floor cannot readily withdraw their money. The Trading Floors Law and Regulations provide, inter alia, for the following: guaranteeing commercial fairness in trading floor operations and marketing; safekeeping of client funds; setting standards for traded securities; setting rules for the scope and nature of disclosure to clients; preventing conflicts of interest and specifying minimum capital and insurance requirements in order to safeguard trading floor stability and provide for possible client compensation. The Trading Floors Law, which is designed to regulate trading floor operations, was published in the Official Gazette in the second half of 2010. That year, the Legislation Department worked in conjunction with the Supervision over the Secondary Market Department, the Financial Instruments Unit in the Investment Department, and the Department for Research, Development and Economic and Strategic Advice to formulate and promote regulations which are a pre-requisite for the Trading Floors Law coming into effect. In addition to stability-related interests in supervising trading floor operations – i.e., supervising 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. These rules are subject to ISA approval and will be formulated and reviewed as part of the licensing process. Upon final enactment of the regulations, trading floors will be subject to regulation and supervision by the ISA. For more information on this matter, please see Section d.2.l below. b.5 Developing legislative infrastructure for an online voting system Following on the continuing trend towards web-assisted operations, the Legislation Department is collaborating with the Information Systems Department to create an online voting system where securities holders – shareholders and others – can vote in meetings, over the internet. This initiative aims to increase public involvement in corporate governance and assist the public in exercising its voting rights. The system will consolidate all information required for voting, and will make voting easier and more accessible. The project has numerous legal ramifications, which are currently being examined by the Legislation Department prior to drafting the supporting

127 legislation. These ramifications pertain, inter alia, to matters regulated under the Companies Law concerning corporate meetings and the summoning thereof, and to actions taken by Stock Exchange members and nominee companies in connection with information on securities holders with relevant voting rights. The voting system is another step in a trend which began in 2003 with the migration 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, the Law was amended to include technological capabilities allowing the ISA to issue notifications, demands, directives, or any other document which the ISA is authorized to issue to supervised entities via secure email (the YAEL system), which is subject to such conditions and specifications as detailed in the amended Law and regulations. These regulations are expected to change once more under the present amendment. It is reasonable to assume that, in the coming year, the ISA will continue to lay down the legislative groundwork required to promote this project. b.6 Front-running prohibition – regulation The Legislation Department drafted and promoted proposed legislation designed to prevent front-running by entities managing other people’s funds and their employees. The legislative amendment also establishes a complete and coherent regulatory framework for holding securities and conducting transactions therein. These provisions have already been enacted through the Advice Law and the Joint Investments Law. In addition to, and in supplementation of, these provisions, the amendment imposes supervisory requirements, whereby companies serving as financial brokers must institute procedures guaranteeing compliance with the proposed bans (i.e., a ban on front-running and restrictions on transactions and holdings), and must appoint a relevant compliance officer. In order to assist companies in meeting their supervisory duties, the ISA proposes that it be authorized to establish guidelines for the procedures which those companies must institute. The ISA’s rules would constitute non-binding, best-practice guidelines for these procedures. For more information on this matter, please see Section d.1.f below. b.7 Review of improvements to the ISA and the Stock Exchange’s rule making power Most second tier regulations formulated by virtue of the primary laws overseen by the ISA are anchored in the Finance Minister’s regulations, in the Knesset Finance Committee’s approvals (excluding the ISA’s authority to set forth rules and directives in accordance with Sections 97 to the Joint Investments Law, Section 28 to the Advice Law, and Section 36A to the Securities Law). This arrangement is cumbersome, as legislative processes are lengthy and do not facilitate rapid and relevant response to new developments and needs on the capital market. Another issue is that arrangements are plagued by insufficient flexibility, and when the ISA is presented with a unique case, sometimes an adequate solution cannot be found through the existing arrangement.

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This lack of flexibility and autonomy is unique among regulatory bodies around the world. Among other things, there has been criticism that the ISA’s insufficient autonomy conflicts with a key principle in IOSCO (International Organization of Securities Commissions), whereby securities authorities must be operationally independent. Current conditions are significantly different from the rule making powers granted to other supervisory bodies in Israel and abroad, in particular from the US SEC and the UK FSA. Regulatory bodies in Israel, such as the Supervisor of Banks and the Capital Market Commissioner, are also granted similar powers. In May 2010, an exposure draft bill was published, which sought to resolve the above problem. The bill proposed that the ISA be authorized to establish administrative provisions regulating the majority of those issues currently governed by regulations, in those fields supervised by the ISA. This is to be done through a mechanism comprised of checks and balances, whereby the ISA will exercise its authority in prescribing these provisions in such a manner that will provide flexibility and efficacy, while bearing in mind current changes in the capital market, as well as the market's complexity. The mechanism is also to provide market players opportunity to present their objections and comments to the proposed provisions, before these become binding. The bill also included clarifications on the function of the ISA's various organs, and their various responsibilities (promoting regulation, approving prospectuses, licensing and supervision). The ISA is currently re-evaluating the arrangement proposed under the exposure draft bill, focusing on the public's ability to make itself heard in the rule making process. The ISA also intends to review the process for approving regulatory instruments proposed by the Stock Exchange. In the coming year, the Legislation Department is expected to amend the bill so as to provide solutions for various issues which have been raised since publication of the exposure draft. For more information on this matter, please see Section d.1.d below. b.8 Additional projects As aforementioned, the Legislation Department collaborates with the various ISA departments in formulating and drafting legislative amendments pertaining to all facets of the ISA’s operations. Key projects, to which the Legislation Department allocated significant resources in the past year, include the following: advancing the Securities Bill (Amendment 48), regulating debt certificate trustee operations, which clarifies debt certificate trustee responsibilities and reinforces the status of debt certificate trustees and debt certificate holders; advancing legislation regulating credit rating agency operations, which sets down a regulatory framework for these companies' operations through a specific law, and subjects these companies to ISA supervision, so as to protect investor interests and guarantee a proper rating process; Amendment 15 to the Joint Investments Law, which, among other things, formalizes the option of setting differential management fees for funds (an initiative which may serve as a catalyst for selectively reducing management fees), and outlines the duties of fund managers for participating in holder

129 meetings and other key corporate decisions; Amendment 16 to the Joint Investments Law, which first and foremost transitions ETN operations from reporting regime to a supervisory regime, and sets forth rules governing this industry, which has grown tremendously over the past decade. Another project that bears mention is the amendment to the Securities Law designed to regulate the supervision of accounting operations in public corporations. These and other amendments also authorize the ISA to enact supplementary regulations, which also require attention, discussion, and the allocation of significant resources. These legislative amendments are discussed in greater detail below, in the chapter covering proposed primary and secondary legislation, entitled Proposed Legislation.

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G. Primary and secondary legislation published in the reporting year c.1 Primary legislation c.1.a ISA Enforcement Streamlining Law (Legislative Amendments) of 2011 [Book of Laws 274, page 206] The Law was published on January 27, 2011, and went into effect thirty days from publication, subject to certain restrictions. The Law provides the ISA with additional enforcement measures, and establishes efficient and effective enforcement tools in addition to the criminal enforcement route. The Law thus streamlines enforcement operations, shortens the time between a violation and the corresponding sanction, and better reconciles the severity of violations with punishment, by allowing criminal procedures to be initiated only in suitable cases. The Law establishes two new enforcement mechanisms – an administrative enforcement process, and settlement agreements for avoiding or suspending proceedings, subject to certain conditions (hereinafter – Enforcement Settlement). Administrative enforcement is designed to handle violations of the securities laws which do not go above negligence. These cases are usually handled through administrative enforcement, while more severe cases, with greater criminal conduct, are handled through criminal proceedings. In order to address administrative violations, an administrative enforcement committee has been established, which is authorized to impose various sanctions, including fines and restriction of business for specified periods of time. The Law grants suspected violators a right to hearing, where they can present their case to the Administrative Enforcement Committee, provided they first submit their arguments in writing. Due to the Committee's limited authority to impose sanctions and the administrative nature of the proceedings, violators are not granted defenses given to defendants in criminal proceedings.

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The Law provides for three enforcement options: First, financial sanctions which the ISA is to impose on minor violations that are relatively easy to investigate. Here, the Law: increased fines; expanded the ISA’s power to impose fines on individuals; authorized the Minister of Finance to enact regulations for reducing fines at the ISA’s discretion, for those circumstances specified in the regulations (for more detail, see below); and differentiated between various levels of sanctions. Second, the administrative enforcement procedure, which allows the administrative enforcement committee to impose a series of sanctions addressing more severe violations, or violations requiring significant investigation. However, this procedure is not intended for the more severe violations which require knowledge or intent on the part of the violator. Third, the criminal procedure, which is designed to address severe violations, and which must be completed before prison sentences can be imposed. As part of these changes, the Law repealed the “fine violation” and “negligence violation” categories previously defined in the securities laws, and increased punishment while distinguishing between companies and individuals. Thus, criminal enforcement proceedings are to be initiated only in those cases actually warranting prison sentences. The Law sets certain limitations on the transfer of cases from one enforcement channel to another. The Law also establishes another mechanism – enforcement settlements. The ISA Chairman, with the Enforcement Committee’s approval, is authorized to decide not to initiate administrative investigation proceedings, administrative enforcement proceedings, or criminal investigations, or to suspend any such active proceedings against a violator or suspected violator, and instead reach an enforcement settlement agreement. These settlements mean that if a violator or suspected violator complies with all the provisions specified in the settlement agreement, they shall not be subject to criminal or administrative proceedings for their past actions. A violator or suspected violator’s agreement to an enforcement settlement is not construed as a confession of their alleged violation, and is not used as evidence against them in any criminal or administrative proceeding concerning those same actions. The District Attorney's Office is also granted this authority for cases submitted to its care (prior to submitting an indictment). Furthermore, the Law prescribes provisions for examining the reliability of ISA-supervised entities (for more information, please see Section b.2 below).

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The amendment to the Law also indirectly amends several other laws – Amendment 45 to the Securities Law; Amendment 16 to the Advice Law; Amendment 17 to the Joint Investments Law; Amendment 14 to the Companies Law; the Courts Law [Consolidated Version] (Amendment 61); and the Trading Floors Law. c.1.b The Joint Investments Trust Law (Amendment 18) of 2011, and the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law (Amendment 17) of 2011 – indirect amendments enacted under the Supervision of Financial Services Law (Pension Advice and Pension Marketing Business) (Amendment 3) of 2011 [Book of Laws 2280, page 366] The Law was published on March 10, 2011, and went into effect immediately. It is an technical amendment accompanying a correction of the Supervision of Financial Services Law’s title, which corrects a reference to this law in the Joint Investments Trust Law and the Advice Law. c.1.c Securities Law (Amendment 46) of 1968 – Indirect amendment enacted under the Companies Law (Amendment 17) of 2011 [Book of Laws 2315, page 1108] The Law was published on August 17, 2011, and went into effect six months from publication. The Amendment expands Section 46(A)(2)(i) of the Securities Law so that, in its rules for listing, the Stock Exchange can require companies to list all their securities in the name of a nominee company (prior to the Amendment, this requirement was only applicable to shares). Table 24 Quantitative data on primary legislation, by year:37

37 Including private bills. 133

Amendments to Joint Investments Securities Law Advice Law primary legislation Law Published in 2011 4 4 3 Published in 2010 5 3 3 Published in 2009 1 1 1 c.2 Secondary Legislation c.2.a Securities Regulations (Annual Fee) (Temporary Provision) of 2011 [Kovetz HaTakanot (Collection of Regulations) 6970, page 606] The Temporary Provision was published on January 31, 2011, and applies retroactively from July 30, 2010. The Amendment reduces by 20% the annual fee for 2010, paid by reporting companies under Chapter 6 of the Securities Law, managers of joint investment in trust funds, and the Stock Exchange. This reduction is similar to the ISA’s reduction of annual fees for previous years. c.2.b Securities Regulations (Periodic and Immediate Reports) (Amendment) of 2011 [Kovetz HaTakanot (Collection of Regulations) 6970, page 596]; Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) (Amendment) of 2011 [Kovetz HaTakanot (Collection of Regulations) 6970, page 603] The Regulations were published on January 31, 2011, and the arrangements specified therein went into effect 90 days from publication. The amendments concern a number of matters: Changes to disclosure requirements for principal shareholder holdings – Several changes were made to the provisions governing principal shareholders: The Regulations now state that the duty to disclose changes in principal shareholder holdings (in prospectuses and in current reporting) also applies to changes in holdings of securities that are not shares or securities convertible into shares; the disclosure requirement for principal shareholder holdings also applies to senior officer holdings; if a principal shareholder in a reporting corporation is a company, and no controlling shareholder exists in that company, disclosure shall be made concerning all principal shareholders in that company. Furthermore, the Regulations expand the list of entities which are required to disclose changes in their holdings as principal shareholders in aggregate and not by way of immediate report (members of institutional reporting groups); changes have been made in the reporting schedule for entities that are members of institutional reporting groups, which are now required to file reports on a monthly, instead of a weekly, basis. The Regulations also amended principal shareholders’ duty to notify corporations of changes in their holdings under the Securities Regulations (Filing of Notifications by Principal Shareholders or Senior Officers) (Amendment) of 2011 (see Section c.2.j below).

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Disclosure on buyback plans – The Regulations formalize a directive issued by the ISA pursuant to Section 36A(b) of the Securities Law, whereby any decision on a buyback of securities by a corporation or a company under its control requires an immediate report, which shall include details concerning the scope of the buyback plan, its exercise date, the reasons behind it, and so forth. A similar reporting requirement was prescribed for board of directors' reports (quarterly and annual) concerning all acquisition plans reported during a reporting period or in effect at the reporting date, including details on the actual implementation of these plans. The Amendment further stipulates that decisions to terminate or change plans will also be grounds for an immediate report. Disclosure of total liabilities by repayment date – The Amendment formalizes a directive issued by the ISA pursuant to Section 36A(b) of the Securities Law, requiring corporations to disclose their total liabilities by repayment dates. The Regulations, as the directive before them, require reporting corporations to publish a report along with their quarterly or annual statements, detailing their liabilities for the next five years, by repayment date, while distinguishing between a corporation’s own liabilities and those of its consolidated companies. Liabilities are further to be divided by class: debt certificates issued to the public; private debt certificates; off-bank borrowings; liabilities to banks in Israel; liabilities to banks overseas; off-balance sheet credit risk (financial guarantees and liabilities given to secure credit facilities). The disclosure requirements set forth in the ISA’s directive assisted the public and other regulatory bodies in monitoring the development and repayment of corporate debts. The Regulations also require that such a report also be issued upon an initial public offering of securities by a corporation. This requirement was established as the information disclosed in the report is relevant for investors and is not conveniently provided in any other report required upon initial public offering of securities. Filing schedule for immediate reports – The Regulations repealed the restrictions whereby corporations which filed an immediate report with the Stock Exchange in the thirty minutes preceding trading or during the course of trading were required to wait at least thirty minutes until they could publish the same information through other channels. This restriction was repealed as it was rendered superfluous by the electronic reporting mechanism. Reporting of changes in equity – Regulation 31 of the Securities Regulations (Periodic and Immediate Reports) of 1970, requires corporations to file immediate reports whenever a change occurs in their registered or issued capital. For economic reasons, and subject to several limitations, an allowance was made, whereby changes of less than one percent in the issued share capital are to be reported in a monthly summary report. c.2.c Securities Regulations (Details, Structure and Form of a Prospectus and Draft Prospectus) (Amendment 2) of 2011 [Kovetz HaTakanot (Collection of Regulations) 6970, page 604]; The Regulations were published on January 31, 2011, and went into effect 30 days from publication.

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The Regulations expanded the disclosure required of reporting corporations under the description of their business. The expanded disclosure is to provide additional information on a corporation's material environmental risk and its material exposure to such risk. Such disclosure reflects a trend already voluntarily adopted by various corporations. This adoption follows a global trend of extensive disclosure on social responsibility, corporate governance, decision making and conduct, community involvement and environmental quality. It also reflects a growing trend among investors, including institutional investors and funds, to hold corporations up to social, environmental and other criteria, which investors believe have a real impact on the future value of securities. Among other things, the regulations state that corporations must detail their material environmental risk; material environment-related legislation applicable to their operations, and their compliance with such legislation; legislation expected to come into effect which will materially effect corporate operations; events which caused environmental damage which exposed a corporation to material risk and for which it is expected to incur material costs; material legal action filed against a corporation; a corporation's policies for managing its environmental risk; etc. Such disclosure is necessary, inter alia, for understanding and analyzing the material implications of environment-related legislation on a corporation’s capital investments, earnings, and competitiveness. c.2.d Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Foreign Providers) of 2011 [Kovetz HaTakanot (Collection of Regulations) 6970, page 606]; Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Application for License, Examinations, Internship and Fees)(Amendment) of 2011 [Kovetz HaTakanot (Collection of Regulations) 6970, page 608] The regulations were published on January 31, 2011, and most went into effect 60 days from publication. Amendment 13 to the Advice Law provides an arrangement, whereby foreigners holding “foreign licenses” to provide investment advice, investment marketing or investment portfolio management services (hereinafter – Foreign Providers), are allowed to offer their services in Israel without obtaining an Israeli license. This, provided that the services are rendered through a licensed corporation to that corporation's clients. The Amendment states that licensed corporations are liable for foreign providers' services and will be required to oversee these services. Section 10B to the Advice Law prescribes the prerequisites for licensed corporations engaging the services of Foreign Providers. The Regulations formalize the procedure for Licensed Corporations and Foreign Providers to apply for entry in the foreign provider registry, as well as actual entry in the registry. The Regulations further specify which documents and details licensed corporations and foreign providers must append to their applications, and the fee required of license applicants.

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c.2.e Securities Regulations (Reduction of Financial Sanctions) of 2011 [Kovetz HaTakanot (Collection of Regulations) 6978, page 704] The Regulations were published on February 17, 2011, and went into effect immediately. On January 27, 2011, the Administrative Enforcement Law was published in the Official Gazette. The Law authorized the Minister of Finance to specify certain cases, circumstances, or considerations, where fines imposed under the Securities Law, the Joint Investments Law and the Advice Law, may be reduced. The Regulations are based on a view that, on the one hand, it is necessary to limit the regulator's discretion so that fine reductions are only made according to well-defined criteria, while at the same time granting the regulator a certain level of flexibility in examining cases individually. Thus, the Regulations specify various reductions for each of the listed circumstances. In most cases, the specified reductions are the maximum permitted rates. It should be noted, that in relevant cases, the ISA may reduce fines by up to 100%, effectively releasing violators of payment. The Regulations served as a pre-condition for the implementation of financial sanction provisions stipulated under the Administrative Enforcement Law. Upon enactment of the regulations, the ISA also began implementing the aforesaid provisions. c.2.f Joint Investments Trust Rules (Tendering Process and Examining Trading Company Ties with Fund Managers) of 2011 [Kovetz HaTakanot (Collection of Regulations) 7009, page 1099] The rules were published on June 28, 2011, and went into effect six months from publication. On February 16, 2010, Amendment 14 to the Joint Investments Law was published, which amended Section 69 of the Law. The Amendment sought to improve the manner in which the Law handles conflicts of interest inherent in contracts signed between fund managers and their related dealers for the rendering of brokerage services for managed funds. Under the revision to Section 69 of the Joint Investments Law, fund managers are required to conduct tenders prior to signing brokerage service agreements, where payment for these services is deducted from the assets of the funds under management. However, two exceptions were provided: First, fund managers may contract without tender when conducting transactions in foreign securities with a dealer that is an overseas member of an exchange, provided that the dealer is unrelated to the fund manager; Second, fund managers may contract a related dealer without tender for a limited portion of transactions involving fund assets, provided the terms of the contract are not preferable to the terms awarded the winning bidder in the tender. Amendment 14 to the Joint Investments Law authorizes the ISA to prescribe rules governing the tendering process, specify those circumstances where a foreign dealer is considered related to a fund manager, and governing contracts with related dealers.

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The rules state that fund managers must conduct fair and unbiased tenders that are open to all dealers, and specify, inter alia, provisions for the following matters: publication of tender documents; pre-requisites required for proper rendering of services; submission of bids to fund managers; the winning bid selection process; notification of tender results. The rules also state that the contract period with dealers shall not exceed three years, and stipulate additional provisions for extending the limitation period. The rules further specify extraordinary circumstances where fund managers may contract a dealer for specific periods of time, without tender. In addition, the rules state that if one of four conditions are met, a dealer shall be considered as being related to a fund manager. These conditions examine, inter alia, whether a dealer is engaged in managing investments for a particular fund manager; whether it constitutes a principal shareholder in the fund manager or the trustee; whether an officer in the dealer is related to an officer or a controlling shareholder in the fund manager or the trustee; and whether the dealer has commercial ties to the fund manager in addition to providing it with brokerage services. These conditions are designed to guarantee that non-tender contracts will only be signed through pertinent considerations and without conflicts of interest arising from any possible association between a fund manager or a controlling shareholder therein, and a foreign dealer or a controlling shareholder therein. Thus, they uphold unit-holder interests over the interests of the fund manager and its controlling shareholders. As regards contracts signed with related dealers, the rules state that such contracts shall only be made for obtaining services directly from the related dealer, except when services are rendered through a foreign dealer for foreign securities transactions. c.2.g Securities Order (Amendment to the First Schedule to the Law) of 2011 [Kovetz HaTakanot (Collection of Regulations) 7012, page 1136] The Order was published on June 30, 2011, and went into effect 30 days from publication. The First Schedule to the Securities Law lists certain types of investors where the offer of securities to those investors does not require publication of a prospectus (hereinafter – classified investors) under Section 15A(7) of the Law. The list of classified investors includes institutional entities and investors characterized by their capacity to make informed investment decisions, and which are in less need of statutory protection. These entities include joint investments in trust funds, provident funds or management companies, insurers, banks, portfolio managers, investment advisors, etc. The Order expands the above list, adding individuals buying for themselves, who meet two out of three criteria concerning equity, expertise, and transaction frequency. Furthermore, the minimum equity required of a corporation for inclusion in the list was amended from NIS 250 million to NIS 50 million. This amendment seeks to allow smaller companies to be granted Classified Investor status. The Order also requires that, prior to purchasing securities, the aforesaid investors will give their written consent attesting that they comply with the criteria specified in the First Schedule to the Securities Law, and acknowledging the significance of their classification as Classified Investors.

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c.2.h Securities Regulations (Periodic and Immediate Reports) (Amendment 2) of 2011 [Kovetz HaTakanot (Collection of Regulations) 7014, page 1154]; The Regulations were published on July 7, 2011, and went into effect immediately. The Regulations set forth several allowances and clarifications concerning the previous amendment to these regulations, date December 24, 2009, as regards assessing the efficacy of internal control and officer statements (ISOX). First, the Regulations state that current regulation will not apply to institutional entities (provident and pension funds), in addition to those insurance companies and banks who were previously excluded. Second, the Regulations clarify the scope of internal control efficacy assessment required to meet the statutory provisions. Moreover, the Regulations repeal the requirement that auditors include a review of internal control efficacy in quarterly statements. C.2.i Securities Regulations (Periodic and Immediate Reports of Foreign Corporations) (Amendment) of 2011 [Kovetz HaTakanot (Collection of Regulations) 7015, page 1162]; The Regulations were published on July 13, 2011, and went into effect on August 1, 2011. The Securities Regulations (Periodic and Immediate Reports of Foreign Corporations) of 2000, specify periodic and immediate reporting requirements for corporations subject to Chapter 5C of the Securities Law (dual-listed corporations). The Regulations state, inter alia, that the dates for periodic reporting (which must be filed and prepared in accordance with the foreign law governing the corporation's operations), will be determined by the foreign law governing the corporation's operations. If no trading is held on the Stock Exchange on that date, reporting is postponed until the start of trading on the Stock Exchange on the first day of trading after filing or publication abroad. As regards immediate reports, prior to the amendment the Regulations stated that reports are to be filed in accordance with Israeli law. This arrangement is extremely cumbersome, in particular when a reporting entity needs to report at a time which does not fall within its business hours. The Amendment aims to rectify this situation, and states that foreign corporations will file periodic and immediate reports according to the applicable foreign law. The Amendment further provides an extension, whereby if no trading takes place on the Stock Exchange on the filing date prescribed by the foreign law, the report will be filed up to half an hour before the start of trading on the Stock Exchange on the first trading day after its filing or publication abroad. c.2.j Securities Regulations (Dates for Filing Notice of Principal Shareholder or Senior Officer) (Amendment) of 2011 [Kovetz HaTakanot (Collection of Regulations) 7015, page 1163] The Regulations were published on July 13, 2011, and went into effect on October 2, 2011.

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The Regulations comprise a supplementary amendment to the Securities Regulations (Periodic and Immediate Reports) (Amendment) of 2011 (detailed in Section c.2.b above), requiring entities to report on changes in the holdings of principal shareholders who are members of institutional reporting groups. The Amendment matches principal shareholders’ duty to notify corporations of changes in their holdings, with allowances made under the aforesaid regulations, including: submitting monthly, instead of weekly, reports to the reporting corporation; expanding the list of entities who benefit from more lenient requirements (according to the list of entities considered members of institutional reporting groups, as specified in the Regulations); and requiring that reports be filed within two days (instead of one day) in the event of a significant change in holdings, as specified in the Regulations. c.2.k Securities Regulations (Periodic and Immediate Reports) (Amendment 3) of 2011 [Kovetz HaTakanot (Collection of Regulations) 7026, page 1298]; The Regulations were published on August 22, 2011, and went into effect immediately. The Regulations formalize, as a permanent arrangement, a disclosure directive issued by the ISA under Section 36A to the Securities Law, concerning disclosure requirements for dividend distributions. The ISA’s directive stated that, in their immediate dividend distribution report, required under Regulation 37(a) of the Securities Regulations (Periodic and Immediate Reports) of 1970, reporting entities which are companies must detail the board of directors’ examination that the corporation meets the earnings test and the solvency test prescribed in Section 302 of the Companies Law, in light of the expected dividend distribution. The Regulations provide a formal anchor for this directive, and expand disclosure requirements to apply to all distributions as defined in the Companies Law (and not only dividend distributions). The Regulations also apply these requirements to non-company reporting entities (such as partnerships and foreign corporations). c.2.l Securities Regulations (Rules for Remuneration and Refund of Expenses for Members of the Administrative Enforcement Committee) of 2011 [Kovetz HaTakanot (Collection of Regulations) 7035, page 1417] The Regulations were published on September 26, 2011. These Regulations are ancillary to the Administrative Enforcement Law (as detailed in Section c.1.a above), and regulate remuneration and refund of expenses for members of the Administrative Enforcement Committee appointed under the said law. Under these Regulations, committee members are entitled to remuneration of NIS 360 for each hour worked. This remuneration covers of all of that member’s expenses incurred in carrying out his duties. Table 25: Quantitative data on secondary legislation by year:

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Amendments to secondary Securities Law Joint Investments Law Advice Law legislation Published in 2011 11 1 2 Published in 2010 8 0 0 Published in 2009 9 6 0

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H. Proposed primary and secondary legislation a. Proposed primary legislation d.1.a Joint Investments Trust Bill (Amendment 15) of 2010 The Bill covers a number of topics, including – changing the fund liquidation mechanism so as to make it more efficient and balanced. An amendment to Section 77 requires mutual fund managers to participate in the general meetings of corporations in which they hold securities. Instead of the present arrangement prescribed by the Joint Investments Law, the Minister of Finance will be authorized to enact more detailed regulations, while accounting for the voting and decision making process. The Bill also includes provisions allowing funds to charge differential management fees from unit holders, according to the value of their holdings, the length of time that they have maintained their holdings, and the identity of the distributor through which they are held. Due to the time that has elapsed since the Bill’s approval in its first reading, and in light of recent developments in the capital market, the ISA decided to suspend its efforts to enact the chapter regulating foreign fund unit offerings in Israel. Instead, the ISA will continue to study this matter, while focusing on increasing the legal protection afforded Israeli unit holders contracting with such foreign funds. 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. d.1.b Securities Bill (Amendment 48) (Debt Certificates) of 2011 The proposed amendment aims to reinforce the status and roles of debt certificate trustees and to expressly anchor their duty to oversee issuers' compliance with their overall obligations towards debt certificate holders. The Amendment clarifies that trustees must act with care and diligence, without preferring the interests of one holder over another, and without any considerations that are not directly related to the holding of debt certificates. The Amendment further proposes that a statutory trustees register be established, and that minimum requirements and capability criteria be set for those seeking entry into the trustees register. Registration would be a prerequisite for serving as a trustee for debt certificates issued to the public. Concurrently, the Amendment proposes that the status of debt certificate holders be reinforced, and that they be granted a number of cogent rights as regards debt certificates. This would be realized, inter alia, by determining certain circumstances which would grant holders grounds to call for immediate repayment of the debt certificates. Furthermore, the Amendment proposes that the Minister of Finance be authorized to enact regulations providing for immediate reporting by trustees to the holders. These regulations would also specify the contents of annual trusteeship reports, so as to allow holders to supervise trustee activities, and replace trustees when necessary.

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Finally, the Amendment proposes to apply the various requirements specified by the Companies Law for summoning shareholder meetings, to meetings of debt certificate holders. The Bill was approved by the Knesset on its first reading on November 22, 2011, and is currently pending review by the Knesset Finance Committee prior to its second and third readings. d.1.c Exposure Draft Securities Law (Amendment) (Principal Shareholder Holdings) of 2010 The Amendment proposes re-defining the terms "principal shareholder", "holding", and "purchase", so as to apply them to additional circumstances which fall under the regulation prescribed for principal shareholders. 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 "principal shareholder", the Amendment defines these as any person with significant holdings in a corporation’s equity or voting rights (5%), or any person serving as a senior officer of a corporation (CEO or director). The Amendment proposes that the definition also includes holdings of securities convertible to shares, rights to shares or debt, where an exercise or conversion of such securities, rights or debt would result in holdings of 5% or more (fully diluted). As regards debt certificates, the Amendment proposes that holdings of 15% or more in a debt certificate series shall 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 comments. d.1.d Exposure Draft Administrative Rule Setting Powers of the Israel Securities Authority Law (Legislative Amendments) of 2010 The Amendment aims to grant the ISA administrative rule setting powers over all supervised entities, in a variety of fields and matters which are currently regulated under the Securities Law, the Advice Law and the Joint Investments Law. This arrangement is similar to the authority currently given other regulators in Israel and abroad. The Amendment proposes an administrative rule setting mechanism, clarifying that administrative enforcement will not interfere with the ISA's authority to implement criminal enforcement against violators. As a complementary measure to this process, the 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 enforcement 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.

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The exposure draft law was published on May 6, 2010. Other legislative amendments approved since require that corrections be made to the exposure draft. Following these corrections, the ISA will act to submit the exposure draft to the Ministerial Committee for Legislation. d.1.e Exposure Draft Regulation of Credit Rating Agency Operations Law of 2010 The Bill aims to establish a regulatory framework for credit rating agency operations. Globalization, developments in financial engineering, and the Basel II Accord have all enhanced the role of the 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 rating method limitations, in problems concerning conflicts of interest and in the lack of transparency in the rating process. The main role played by rating companies 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 the supervision over these companies. The Amendment aims to provide primary legislation, through a specific law, regulating the activities of rating companies. This law will subject rating companies to the ISA's supervision, so as to protect investors and guarantee that the rating process and the rating itself are reliable, credible, equal, and independent. In light of international regulatory activities and in light of the international nature of those rating companies’ operating in Israel, the Bill proposes that the principles underlying regulation in Israel will 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 accordingly formulated as a legislative framework specifying only regulatory principles. The details of the regulatory mechanism will be specified through subsequent regulations and rules enacted under the proposed law. This legislative structure is fitting under the circumstances, and provides the necessary freedom to examine the developing regulatory arrangement over time. It will also provide flexibility down the road, when emerging global regulatory trends in this matter become clearer. The draft exposure bill was published on June 17, 2010. d.1.f 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 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 counter-party. This information grants Front Runners an unfair advantage.

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Second, the Amendment seeks to establish a comprehensive and coherent regulatory framework governing the holding and trading of securities. These operations are currently regulated under the Advice Law and the Joint Investments Law. The Amendment will formalize an arrangement which will serve both of the above laws, according to each law's unique characteristics. In addition to, and in supplementation of, these provisions, the Amendment imposes supervisory duties, whereby companies serving as financial brokers, and employing other financial brokers, must institute procedures guaranteeing compliance with the proposed bans (i.e., a ban on front-running and restrictions on transactions and holdings). Furthermore, these companies must also appoint a relevant compliance officer. In order to assist companies in meeting their supervisory duties, the ISA proposes that it be authorized to set forth guidelines for the procedures which those companies must institute. The ISA’s guidelines will constitute a non-binding, best practice model for the said corporate procedures. The previous exposure draft in this matter also referred to cases of unfair use of information which do not constitute front-running activities (in effect, an partial adoption of the US misappropriation doctrine). Following publication of the exposure draft, the ISA Plenum decided, at this stage, to address only those two issues detailed above (Plenum resolution dated October 24, 2010). An updated version of the Bill has been uploaded to the ISA website. An amended draft exposure bill was approved by the ISA Plenum on October 24, 2010, and published for public review. The amended exposure draft supersedes the previously published exposure draft. d.1.g Joint Investments Trust Bill (Amendment 16) (ETNs and ETFs) of 2010 The Amendment regulates the ETN and ETF market. The Amendment is necessary in light of the accelerated development of passive investment instruments 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 Investment in Trust Law is detailed and binding, providing close supervision, ETNs, which offer an alternative investment to mutual funds, are only subject to disclosure requirements. The Amendment aims to regulate the ETN market in a similar manner to that which currently applies to mutual funds, mutatis mutandis. The Amendment further proposes to regulate 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 on the current financial instrument offering, will allow fair competition between alternative products, and will render competition more effective. Regulation is also expected to allow ETN issuers to participate in the operation of ETFs, if they so wish.

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The draft exposure bill was published on November 16, 2010. d.1.h Investment Broker Regulation Bill of 2011 On February 21, 2010, the ISA Plenum approved a legislative framework for regulating investment broker operations. This framework also lays down the legislative groundwork for establishing a supervisory council, which will itself be subject to ISA supervision. This council, which will include industry representatives, will regulate and oversee all broker operations. At this point, the ISA has decided to pursue enactment of only the most critical component of the aforesaid framework – broker and dealer operations. Later, the ISA will review additional parts of the aforesaid legislative framework. b. Proposed Secondary Legislation d.2.a Joint Investments Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts) (Amendment) of 2011; Joint Investments Trust Regulations (Buying and Selling Prices of Fund assets and Value of Fund Assets) (Amendment) of 2011; Joint Investments Trust Regulations (Details, Structure and Form of a Fund Prospectus) (Amendment) of 2011; Joint Investments Trust Regulations (Financial Statements for Funds) (Amendment) of 2011; Joint Investments Trust Regulations (Options, Future Contracts and Short Sales) of 2011 About two years ago, extensive amendments were made to the Joint Investments in Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Amounts) of 1994 (hereinafter – Assets Regulations), which established a regulatory framework for a new instrument known as a fund of funds. A fund of funds is an open fund which may invest all of its assets solely in other funds, bank deposits, or cash. Funds of funds are split into two groups – Israeli, and foreign. For Israeli funds of funds, investment has been limited only to those funds managed by the fund of fund manager. In foreign funds of funds, fund managers may only invest in funds established outside of Israel. Under the proposed amendments, managers of Israeli funds of funds may invest in any open 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 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 buy 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.

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In addition, amendments have been made to the Fund Financial Statements Regulations. These amendments postpone the mandatory application of IFRSs on financial statements prepared by mutual fund managers, and state that IFRS- compliant statements shall be required from 2016 onwards, and not from 2011. Lastly, technical amendments have been made to the Options Regulations, clarifying the definition for stock exchange indices. These regulatory amendments were approved by the Knesset Finance Committee on November 14, 2011. d.2.b Securities Regulations (Exception with regards to Bank Shares in the Arrangement) (Amendment) of 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 in the leading Israeli banks (Bank Hapoalim Ltd., Bank Leumi LeIsrael Ltd., Israel Discount Bank Ltd., and United Mizrahi Bank Ltd.) to government ownership. The ownership right granted the government is limited in nature, and so the Securities Regulations (Exception with regards to Bank Shares in the Arrangement) (Temporary Provision) of 1993 were enacted concurrently with the law's publication. The regulations exempt arrangement banks, including companies in which the arrangement banks constitute principal shareholders, 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 validity has been periodically extended in light of the fact that sale of the government’s holdings has 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 in which the State retained holdings. 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 validity of the regulations by a further two years, while removing mention of Discount Bank, so that the regulations pertain only to Bank Leumi. The regulations were approved by the Knesset Finance Committee on November 28, 2011, and are pending the Minister of Finance's signature prior to their publication in the Official Gazette. d.2.c Securities Regulations (Periodic and Immediate Reports) (Amendment) of 2011 These Regulations formalize, as a permanent arrangement, an ISA disclosure directive published in 2009, which expired at the end of 2011. The Regulations also apply various changes which were found to be necessary while implementing the ISA directive.

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The Regulations specify disclosure requirements for immediate reports before debt certificate holders can approve a debt settlement agreement. This disclosure 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 (exercising collateral, calling for immediate repayment, liquidation), or initiate legal action against a 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 (e.g., 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, including the following: 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 worthwhile. Thus, inter alia, the Regulations require disclosure on payments to officers under the settlement; disclosure on the transfer of material company assets in the preceding six months; and disclosure of restrictions on distributions and transactions requiring special approval. The Regulations also provide for disclosure on individuals providing material guarantees, and disclosure of any valuations given the company. The Regulations further require corporations to attach a signed expert opinion by an attorney, if any significant change has occurred in the terms of their securities. The Regulations propose advancing the publication date for reports to the meeting summons date, so as to allow debt certificate holders to review proposed debt settlements and influence their terms. This proposed requirement holds even if a meeting is summoned only to obtain a principle approval of a settlement, and also requires that the information disclosed in the debt settlement report be updated immediately prior to the summons date. The Regulations are expected to be approved by the Knesset Finance Committee and be published in early 2012. d.2.d Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Application for License, Examinations, Internship and Fees) (Amendment) of 2011; Securities Regulations (Annual Fee) (Amendment) of 2011.

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The Advice Law mandates that licensing to provide investment advice, investment marketing and investment portfolio management services be subject to professional examinations and completion of internships. The proposed Regulations implement changes in the licensing examinations and internship programs. These changes seek to increase the professional level of license holders, while simplifying licensing procedures. In addition, the Amendment proposes changes in the fee system applied to license holders and applicants. Among other things, the Amendment proposes that differential fees be applied to license holders, new fees be imposed (including for Foreign Providers), and that existing fees be increased. Fee increases are designed, inter alia, to negate the unreasonable gap between the fees charged of fund managers, which are substantially higher than those charged of license holders. The complementary amendment proposed for the Securities Regulations (Annual Fee) of 1989, reduces the annual fee paid by fund managers. The proposed Amendment is currently pending approval by the Knesset Finance Committee. d.2.e Securities Regulations (Offer of Securities to the Public) (Amendment) of 2011 Section 17C to the Securities Law states that public offers must be uniform in price and in all other terms. Furthermore, offers are to be universal. Regulation 11(a)(3) to the Securities Regulations (Offer of Securities to the Public) of 2007, provides an exception to this rule. The ISA proposed amending Regulation 11(a)(3) so as to permit non-uniform offers in the following unique cases: in 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. The amended Regulations also propose that the ISA be allowed to stipulate conditions for granting a permit to issue a prospectus for non-uniform offers. d.2.f Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Reports) of 2011 The proposed Regulations regulate disclosure requirements for license holders under the Advice Law, on the following three levels: first – quarterly reporting by portfolio managers to clients on managed portfolios; second – annual public reporting by portfolio management companies, essentially similar to a prospectus; third – reports by all license holders to the ISA.

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Currently, statutory reporting requirements for license holders are extremely limited. For example, the law does not require portfolio managers to provide clients with disclosure on the return yielded by a portfolio over a certain period of time. Nor is any disclosure required on whether a client earned or lost money over a given period. Furthermore, reports currently sent to clients are not uniform in form or content. As a result, it is difficult for clients to locate essential information, even if such information is contained in the report. Potential clients are also not provided with uniform and comparable information, and do not have adequate tools to choose between licensed companies as each company determines the content which it presents potential clients and the manner of its presentation. 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, and avoiding excessively cumbersome requirements for license holders. The proposed regulations will set both form and content requirements for license holders’ disclosure. In other words, the reporting format prescribed by the regulations will be binding. This reform coincides with other recent ISA initiatives, both in the scope of disclosure required of supervised entities, and in establishing uniform reporting formats. The proposed regulations also require banks to report on advisory operations carried out through license holders under employment. Reporting is carried out through two channels: first, monthly reports by the banks, detailing all advisory operations carried out in the preceding month. Second, reports submitted following a demand for more information by the ISA. The proposed regulations are pending approval by the Knesset Finance Committee. d.2.g Securities Regulations (Stabilization of Prices) of 2011 and Securities Order (Amendment of the Fifth Schedule to the Law) of 2011 As part of the underwriting reform, the ISA decided to adopt rules enabling underwriters to stabilize the prices of securities in an offering, provided certain conditions are met. To this end, Section 54(a)(2) to the Securities Law was amended so as to determine that any person acting according to the stabilization regulations will not be regarded as fraudulently influencing fluctuations in the prices of the stabilized securities. The proposed regulations complement this change and prescribe the rules referred to by the amendment to the Law. The ISA further proposes to amend the Fifth Schedule to the Securities Law, so as to enable financial sanctions to be imposed on underwriters who violate some of the Regulations. The proposed amendments are pending approval by the Knesset Finance Committee. d.2.h Securities Regulations (Signature Approval) of 2011; Securities Regulations (Secure Email) of 2011

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These Amendments accompany Amendment 38 to the Securities Law, published on July 27, 2009. Amendment 38 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 amended law and regulations. This serves to complement the 2003 amendment requiring that reports to the ISA be submitted using the MAGNA electronic reporting system. The effective date for Amendment 38 was set to coincide with the effective date of the amended regulations. Under the present amendment to the Securities Regulations (Signature Approval), various provisions applied to the MAGNA system have also been applied, mutatis mutandis, to the secure email system. Furthermore, the Regulations provide for system access permissions and corresponding data transfer procedures. The amendment to the Securities Regulations on the secure email system regulates access permissions to the email account, access frequency, and the duties of those persons granted access. The Amendment states, among other things, that all supervised entities must appoint an individual who will be authorized to access the secure email account. The Amendment further states 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. The Securities Regulations (Signature Approval) (Amendment) were approved by the Knesset Science and Technology Committee on March 9, 2010. The Securities Regulations (Secure Email) were approved by the Knesset Finance Committee on May 4, 2010. Although the regulations were approved by the Knesset committees as aforesaid, they have yet to be published in the Official Gazette. Publication has been postponed as, following approval by the Knesset committees, it was decided that the ISA, and not the IT Department in the Ministry of Finance Accountant General's Division, will oversee the system’s development. This decision requires various corrections in the regulations, which have already been submitted to the Minister of Finance and Minister of Justice for re-approval. d.2.i Securities Regulations (Underwriting) (Amendment) of 2011 Two main amendments 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 Registry. 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 Registry, the ISA shall 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 formal integrity requirement prescribed by other existing and proposed securities legislation, such as for trading floors, fund managers, investment advisors, etc.

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The Amendment also proposes authorizing the ISA to remove an underwriter from the Registry if there are indications for a flaw in integrity. Such power of removal shall be subject to a list of relevant indications which the ISA shall publish pursuant to its powers under the Securities Law. The ISA will apply this list in all its integrity-related examinations of its various supervised entities. 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). Alternatively, they may serve as underwriters if they are a foreign underwriter which meets the applicable conditions specified in the Regulations (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 Underwriters 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 their inclusion in the Underwriters Registry. 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. The Amendment also proposes that current restrictions, whereby banks or insurers may not serve as underwriters, shall 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 d.2.m below. The Regulations have been submitted to the Minister of Finance following the mandatory consultation with the Minister of Justice. Following the Minister of Finance's review, the Regulations will be submitted to the Knesset Finance Committee. d.2.j 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 Law requires fund managers to participate in the general meeting of corporations whose securities are held by their fund. As aforesaid, Amendment 15 to the Joint Investments Law proposes amending Section 77 so as to authorize the Minister of Finance to enact more detailed regulations, which will account for the voting and decision making process.

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This authorization is based on the recommendations submitted by the Committee for Examining Necessary Measures to Increase Institutional Entity Involvement in the Capital Market in Israel (the Hamdani Committee). The Committee’s recommendations included the following: 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; resolving potential conflicts of interest which may impair judgment when voting; allowing institutional entities to enlist the aid of professional service providers in formulating their voting recommendations; increasing institutional entity involvement in director appointments, particularly external 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 meetings summoned by a corporation 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. 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. d.2.k 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 7C to the Securities Law, concerning 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 computerized systems through which clients can trade. The Law was written as a legislative framework, and lays down 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 the granting and revocation of licenses). The Minister of Finance was authorized to enact principle regulations that will govern trading floor operations. On October 24, 2010, the ISA Plenum approved a proposed draft of these regulations, covering the following matters: leveraging; conflicts of interest; examination of client understanding and matching activities with client capabilities; trading floor advertising and marketing activities; license application; reporting to the ISA and information which trading floors must disclose to clients. The regulations also provide for the manner in which client funds are to be managed, record keeping, and recording of transactions.

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The regulations also propose to amend the Seventh Schedule to the Securities Law and add trading floor-related violations to the violations listed in the schedule. The regulations have been submitted to the Knesset Finance Committee for approval. Concurrently, the Legislation Department is working in collaboration with the Department for the Supervision of the Secondary Market, and with the Research, Development and Economic and Strategic Advice Department, to formulate complementary chapters in the regulations. These chapters will govern equity and insurance requirements, as well as fees. The ISA expects these chapters to be submitted to the ISA Plenum for approval in early 2012. d.2.l 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 matters: Mandatory filing of fairness declarations and updated reports – Under the proposed amendments, when a public company is taken private or dissolved, i.e., in mergers and in complete purchase offers (self-purchase or purchases by controlling shareholders), the buyer and the board of director of the dissolved company (hereinafter – the target company) must file a declaration on the fairness of the price offered to shareholders. The proposed amendments further specify that Target Companies must issue an updated report on material changes or developments that have occurred since their last periodic or quarterly report, as relevant. These requirements aim to provide investors and shareholders in Target Companies with all decision-relevant information for deciding whether to accept a complete purchase offer or approve a merger. In order to allow declarations of fairness and updated reports to be filed as aforesaid, the proposed regulations extend the minimum period required between issuing a specification for a complete purchase offer and the final deadline for acceptance, from 14 to 21 business days. Authority to grant an exemption from the ban on conducting transactions during the acceptance period – The Securities Regulations (Purchase Offer) of 2000, state that during a 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 offered securities. The proposed amendments authorize the ISA to grant specific exemptions from this ban. Exemption is to be granted if 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.

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General update requirement – The proposed amendments clarify that a general update requirement exists for reports and documents issued to the public, and which serve 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. Among other things, the proposed amendments require that updates be issued for the following: purchase offer specifications; controlling shareholder transaction reports; private offer reports; and summons of meeting 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 – The proposed amendments state 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 a right to redeem debt certificates through deeds of trust. Through these options, the parties can avoid the minority interest derailing the complete purchase offer, without exercising a forced sale. Inclusion of 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. This report is issued a set period of time before summoning a general meeting to approve the Transaction. The proposed amendments state that, if in the period between publication of a Transaction report and the date of the general meeting, additional financial statements are published, 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. 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 d.2.m below. The Regulations have been submitted to the Minister of Finance following the mandatory consultation with the Minister of Justice. Following the Minister of Finance's review, the Regulations will be submitted to the Knesset Finance Committee. d.2.m Securities Order (Amendment to the Fifth Schedule to the Law) of 2011; Securities Order (Amendment to the Seventh Schedule to the Law) of 2011

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In addition to the amendments detailed in Sections d.2.i and d.2.l 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). The proposed amendments add 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. The proposed amendments also add to the list of violations a breach of duty to notify the ISA and the underwriter of flaws in the integrity of an underwriter, a controlling shareholder therein, or an officer in either. The above orders have been submitted to the Minister of Finance following the mandatory consultation with the Minister of Justice, and are expected to be submitted to the Knesset Finance Committee along with the amendments detailed in Sections d.2.k and d.2.l. d.2.n Securities Regulations (Shelf Registration 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 regulations enacted under the Securities Law – provisions allowing information to be included by way of reference, refer to information being included in 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 pending their submittal to the Knesset Finance Committee. d.2.o Administrative Violations Order (Change to the First Schedule to the Law) of 2011; Administrative Violations Regulations (Administrative Fine – Investment Advisors and Investment Portfolio Managers) (Repeal) of 2011; Administrative Violations Regulations (Administrative Fine – Failure to Report Preparations for Y2K Bug Issues) (Repeal) of 2011 These amendments are pending review by the Ministry of Justice. The amendments propose repealing the Failure to Report Regulations and the Investment Advisor Fines Regulations, and to amend the first schedule to the Administrative Violations Law of 1985 (hereinafter – the Administrative Violations Law) so as to repeal the reference to the Securities Law, the Joint Investments Law, and the Advice Law. These amendments are made for the following reasons: Repeal of the Failure to Report Regulations – The regulations which required reports on preparations for the Y2K bug, where enacted as temporary provisions. The regulations expired more than a decade ago, rendering the Failure to Report Regulations superfluous. As the regulations pertained to a non-recurring event, which transpired more than ten years ago, there is no value in maintaining the Failure to Report Regulations.

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Repeal of the Investment Advisor Fines Regulations – In 2006, Amendment 10 to the Advice Law went in to effect. Amendment 10 added Chapter 6A, 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 ISA’s experience shows that financial sanctions imposed under Chapter 7A are better suited to the ISA’s needs, and are preferable to the procedure stipulated by 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, there is no longer need for administrative procedures initiated in accordance with the Administrative Violations Law. Amendment of the First Schedule to the Administrative Violations Law – Section 4 to the Administrative Violations Law states that, upon repeal of the administrative violation regulations, the Minister of Justice may repeal the reference 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 proposed orders amend the First Schedule to the Law so as to omit the names of the aforesaid laws and regulations. d.2.p Securities Regulations (Reports by Debt Certificate Trustees) of 2011; Securities Regulations (Reports by Issuers to Debt Certificate Trustees) of 2011; Securities Regulations (Competency Requirements and Registration for Debt Certificate Trustees) of 2011 The Securities Bill (Amendment 48) (Debt Certificates) of 2011, referenced in Section d.1.b in the Proposed Primary Legislation Chapter, grants the Minister of Finance various powers to enact regulations on various matters. Among other things, these regulations are to prescribe reporting requirements for trustees (towards the ISA and towards the public); reporting requirements for issuers (towards trustees); and competency requirements for trustees (equity, deposit or insurance). A draft version of the regulations was submitted to the ISA Plenum for approval together with the draft version of the law. Following the bill’s publication in the Official Gazette, the Legislation Department is currently amending the proposed regulations and completing the legislative preparations required to bring the law into effect. The regulations were approved by the ISA Plenum on March 30, 2009. d.2.q Joint Investments Trust Regulations (Backing Account) of 2011 Amendment 16 to the Joint Investments Law regulates ETNs and ETFs. Among other things, Amendment 16 adds a requirement that joint investment managers open a backing account. Under the proposed regulations, ETN managers will be required to allocate capital in their backing accounts, covering their operating risk, market risk, and credit risk. Fund managers, on the other hand, will be required to allocate capital covering only their operating risk.

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The Regulations seek to balance adequate capital allocation requirements, which will not be excessive to the point of collapsing the ETN market, and the need to minimize economic incentives for risk-taking, and encourage ETN managers to be more conservative in their operations. Therefore, the proposed Regulations prescribe various deposit requirements for joint investment managers’ backing accounts. Deposit requirements were determined according to the model formulated and approved by the ISA Plenum. The Regulations further prescribe provisions governing the types of assets to be deposited in the backing account, and procedures for withdrawing these assets. The proposed regulations were approved by the ISA Plenum on September 21, 2011. d.2.r 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 relevance. Moreover, recent market developments, as well as legislative developments, have caused the prior commitment mechanism to become a vehicle for unjust discrimination among various types of investors. A recently enacted amendment, which was designed to expand the list of persons who may purchase securities in a non-prospectus offer, indirectly led to a technical expansion of those using the prior commitment mechanism, and added various entities which were never intended to be granted preference in prices. The preferential treatment of these entities is not necessary to achieving the prior commitment mechanism's purpose. Under the proposed regulations, investors who are entitled to purchase securities through prior commitment, are only those investors who manage money on behalf of others. The proposed amendment mostly pertains to the Securities Regulations (Offer of Securities to the Public) of 2007. In supplement to this amendment, the ISA proposes making various technical amendments to the Securities Regulations, so that terminology will match the proposed change. The regulations were approved by the ISA Plenum on September 21, 2011, and have been submitted to the Minister of Finance for consultation with the Minister of Justice, prior to their submittal to the Knesset Finance Committee. d.2.s Joint Investments Trust Regulations (Redemption Price for ETN Units and Value of ETN Assets and Liabilities for Integrity Testing of ETN Assets) of 2011

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Amendment 16 to the Joint Investments Law, which provides for the regulation of ETN and ETF operations, proposes that ETNs be comprised of units. Each unit grants equal right to an ETN's assets, plus or minus the positive or negative redemption difference accrued on the ETN, respectively. A negative redemption difference constitutes a debt by the ETN manager towards the unit holders, and so constitutes an ETN asset. A positive redemption difference constitutes a debt by the ETN towards the ETN manager, and so constitutes an asset for the ETN manager. Amendment 16 provides, inter alia, for the settling of accounts between ETN managers and ETNs. The Regulations provide for the revaluation of the various assets and liabilities held by ETNs, used in measuring the ratio of the net value of ETN assets to redemption price. This measurement is required to estimate ETN redemption differences, i.e., the difference between the net value of an ETN’s assets and the total redemption price of all ETN units. The regulations were approved by the ISA Plenum on November 23, 2011. d.2.t Joint Investments Trust Regulations (Reports) (Amendment) of 2011 Fund manager and trustee fees are 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 above, Regulation 20F of the Joint Investments Trust Regulations (Reports) of 1994 (hereinafter – the Regulations), states that fund managers and trustees, as applicable, must report on changes in their fees. This report must detail the date on which such changes went into effect, and the fees 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 fee changes that they can make. In practice, changes in fee percentages, and in particular for fund managers, are quite common. Frequent changes in manager or trustee fees undermine their use as a stable decision-making parameter for investing in a fund. In light of the above, the Amendment proposes that, in addition to information on the present fee update, the Report also disclose information on fee updates from the preceding three to four years, as permitted by the date of the fund's initial offer of units. This disclosure aims to allow investors to include the stability of fund manager and trustee fees in their 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' addresses, as mandated for reports of special importance. The regulations were approved by the ISA Plenum on November 23, 2011. I. Private and Government Bills Pertaining to ISA Operations

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The following are private bills drafted or legislated in conjunction with the ISA, which have been published or are currently pending legislation: a. Corporate Governance for Fund and Portfolio Managers Law (Legislative Amendments) of 2011 [Book of Laws 2320, page 6] The Law was published on November 16, 2011, and went into effect six months from publication. The Law aims to enhance and improve corporate governance requirements for mutual fund managers who are not public companies. The Law also applies corporate governance requirements for large portfolio management companies who are not public companies. In this regard, the Law defines large portfolio management companies as either companies with more than 50 clients and assets with a total value of more than NIS 5 billion, or companies with more than 1,000 clients. The Law was enacted following a private bill submitted by Knesset Members Amnon Cohen, Faina Kirschenbaum, and others. The ISA was involved in formulating and drafting the Law. Among other things, the Law includes mutual fund corporate governance provisions included under the Joint Investments in Trust Bill (Amendment 15) of 2010, which was initiated by the ISA. Due to the similarity between large portfolio management company operations and fund managers managing money on behalf of others, and public companies in which the public invests, and in light of the risks posed by these operations to public investments, the ISA believes that strict corporate governance rules should be set for large portfolio management companies. The Law includes provisions which guarantee fund trustees’ independence of fund managers; clarify trustee supervisory duties; and reinforce control, supervision and auditing activities in fund managers and large portfolio management companies. The amendment to the Law includes indirect amendments to various other law including Amendment 47 to the Securities Law, Amendment 20 to the Advice Law, and Amendment 18 to the Joint Investments Law. b. Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Bill (Amendment – Investment Advice Services) of 2011 This is a private bill submitted by Knesset Members Amnon Cohen, Faina Kirschenbaum and others, and the ISA took part in formulating and drafting the bill.

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In addition to various operations which can be defined as “classic investment advice”, where investment advisors advise specific clients concerning their investments, the current definition for “investment advice” also includes “general investment advice”. This latter term refers to uniform and non-specific advice given to a large, and sometimes unknown, number of people, where the recipients of such advice do not expect it to be personalized to their specific needs, and where advice is not rendered through personal communication between the advisor and his audience. The Bill covers the following main issues: 1. 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. 2. 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 on its preliminary reading on July 6, 2011, and is currently pending review by the Knesset Finance Committee in preparation for its first reading. The above is not an exhaustive list of all private bills submitted or published in 2011, which pertain to matters under the ISA’s supervision. Thus, for example, two legislative amendments published during 2011 were the result of private bills – the Securities Law (Amendment 44) of 2011, and the Joint Investments Trust Law (Amendment 19) (Publication of Prospectus in a Newspaper) of 2011. Furthermore, during the year, the Legislation Department was required to refer to government bills, published or currently undergoing legislation, which relate to ISA operations. These bills include the Companies Law (Amendment 16) of 2011; the Companies Law (Amendment 17) of 2011; the Pledge Bill of 2011; the Criminal Procedure Law (Enforcement Powers – Communications Data) (Amendment) (Various Amendments); the Wiretapping Law (Amendment 6) of 2009. J. Directives a. New directives During the year, the ISA issued the following directives in accordance with Section 36A of the Securities Law: f.1.a Disclosure of investment property operations The directive was issued on January 11, 2011, and applies to periodic and quarterly statements and prospectuses including financial statements as of December 31, 2010 or later.

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The directive was issued as the first phase of a general financial reporting overhaul. In this initiative, the ISA is reviewing various aspects of reporting on company operations in prospectuses and in periodic and immediate reports, and the manner in which reporting companies apply the reporting model. The directive seeks to improve relevancy, comparability (across different companies and between reports filed by the same company for different periods), and the reliability of disclosure guidelines in the income-generating real estate market. These goals are achieved, inter alia, by removing redundancy in disclosure guidelines, organizing information and improving relevancy, so as to allow investors to make informed investment decisions. The directive seeks to attain these goals by interpreting the First Schedule to the Securities Regulations (Details, Structure and Form of a Prospectus and Draft Prospectus) of 1969, specifically for the income-generating real estate market. f.1.b Disclosure on the financial statements' approval process The directive was issued on February 21, 2011, and applies starting from the 2010 annual statements. The Companies Regulations (Provisions and Criteria for Financial Statement Approval Processes) of 2010, prescribed procedural guidelines for the approval of financial statements in public companies. According to the regulations, financial statements are to be submitted to the board of directors for review and approval only after a prior approval process outlined in the regulations. This approval process includes a review of the company's financial statements by a corporate committee specifically designated to review financial statements. This committee must formulate a recommendation for the board of directors in each of the matters specified by the regulations, and submit its recommendations to the board of directors a reasonable period of time prior to its discussion. The committee must also report of any flaw or issue that it finds during its review process. The committee must summon the company auditor to its meetings and notify the company’s internal auditor, who may also participate in these meetings. The board of directors approves that company’s financial statements only after reviewing the committee’s recommendations. In light of the aforesaid, and considering the importance to investors of the information concerning the financial statements’ approval process, the ISA issued its aforesaid directive, which specified disclosure requirements concerning reporting corporations' compliance with the aforesaid provisions. f.1.c Disclosure on oil and gas exploration and production operations The directive was issued on March 14, 2011, and applies to periodic reports starting from the 2010 periodic reports. As regards prospectuses, the directive will apply to prospectuses permitted by the ISA after the directive publication date. As regards immediate reports, the directive will apply to immediate reports issued after the directive publication date.

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This directive is also part of the general financial reporting overhaul, where the ISA is reviewing various aspects of reporting on company operations in prospectuses and in periodic and quarterly reports, and the manner in which reporting companies apply the reporting model. The directive, which was made necessary by developments and discoveries announced in early 2011 by the oil and gas partnerships, clarifies disclosure requirements for this industry, so as to support investors in making informed decisions. f.1.d Disclosure on risks and restrictions due to contact with Iran or enemy countries The directive was issued on November 27, 2011, and went into effect 30 days from publication. The directive seeks to guarantee that periodic reports and prospectuses fully disclose reporting companies’ exposure to the various restrictions prescribed by law, both in Israel and abroad (as relevant to each company’s operations), concerning ties with Iran or enemy countries, to the extent that each company deems this exposure material to its operations. The directive specifies the scope of the necessary disclosure, its type, and its timing. f.1.e Disclosure on votes by principal shareholders, senior officers, and institutional entities in meetings The directive was issued on November 30, 2011, and went into effect on January 1, 2012. The directive specifies, for general meetings which a special majority is required by law, that corporations must detail the votes cast by principal shareholders, senior officers or institutional entities in their immediate report on such meeting. Disclosure is to be made to the best of the corporation's knowledge. The directive also includes a similar disclosure requirement for votes cast by bond holders in meetings in which debt settlement agreements are approved, for the same reasons mentioned above. In order to comply with the directive, corporations are requested to include in their relevant voting proxy reference to whether a vote is cast by a principal shareholder, senior officer, or institutional entity as defined in the directive. b. Extended directives f.2.a Disclosure on credit risk, market risk and public holdings in financial instruments The directive was issued on February 3, 2010, and went into effect on May 1, 2010. In January 2011, the Minister of Finance approved the directive's extension by another year.

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The fact that financial instruments are issued by special-purpose companies with limited economic resources, requires that additional disclosure be made on the main risks incurred by these companies. The directive requires that issuers of financial instruments disclose, by way of monthly reports, the scope of public holdings and the sources of their credit and market risk. In their quarterly reports, issuers of financial instruments must disclose relevant credit risks, including a quantitative description of these risks. Furthermore, issuers are required to describe relevant market risks, including a description of backing asset classes, sensitivity tests to changes in market factors and fair value at risk for each financial instrument. In their annual reports, issuers must also provide extensive disclosure on relevant credit risks, including qualitative information on their credit risk management policies, and information on the credit risk to which they are exposed. The directive further states that any material change in credit risk, in certificate series, in a company or in a managing entity must be disclosed by way of immediate report. f.2.b Disclosure requirements for projected cash flows The directive was issued on November 18, 2010. In December 2011, the Minister of Finance extended the directive by another year. The directive refers to the manner in which projected cash flows are prepared by corporations in which those warning signs indicated by Regulation 10(b)(14) to the Securities Regulations (Periodic and Immediate Reports) of 1970, have been found. The directive prescribes criteria for presenting the projected cash flow report, including its underlying assumptions and the accompanying board of directors' explanations. The directive was issued following the ISA’s experience since enactment of the above regulation, and in light of the fact that the ISA found a significant number of projected cash flow reports which were flawed or did not comply with the regulation, and in light of the lack of uniformity in these reports. Among other things, the directive prescribed a uniform disclosure format, which includes, for example, details of financial sources used to repay material liabilities in the short term, and comparison between prior cash flow forecasts and actual historical cash flows, along with board of directors' explanations in case of material differences between the two. Upon its extension, the directive was corrected so as to clarify that corporations must test for warning signs both in its separate and consolidated financial statements.

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X CRIMINAL ENFORCEMENT DEPARTMENT 1. Criminal indictments In 2011, following investigations performed by the ISA, eight indictments were filed by the Tel Aviv District Attorney's Office (Taxation and Economics Department):38 In February, an indictment was filed in the Tel Aviv District Court against .א Pacifica Holdings Ltd. (hereinafter – Pacifica), Shlomo Wald, Moshe Vaig, Yosef Antwarg, Yoav Barak, and Jacob Birnbaum on suspected violations of the Securities Law of 1968 (hereinafter, in this chapter – the Securities Law), and the Penal Code of 1977 (hereinafter, in this chapter – the Penal Code). At the dates referenced in the indictment, Pacifica was a publically traded company, whose shares were traded on the Tel Aviv Stock Exchange (hereinafter, in this chapter – the Stock Exchange). In December 2006, Pacifica started to be involved, through its subsidiaries, in the initiation, maintenance, and management of real estate assets in Romania. The indictment accuses the defendants of three charges: Under the first charge (against Shlomo Wald), Wald was accused of forgery – in violation of Section 418 of the Penal Code; obtaining by fraud – in violation of Section 415 of the Penal Code; fraud and breach of trust in a corporation – in violation of Section 425 of the Penal Code; and failure to comply with the provisions of Section 36 of the Securities Law and Regulations (Periodic and Immediate Reports) of 1970 (hereinafter, in this chapter – the Periodic and Immediate Reports Regulations) – in violation of Section 53(a)(4) of the Securities Law. Shlomo Wald is a lawyer and businessman. Pacifica reported him as being a member of its controlling group, along with the Nat East company. Wald led Pacifica’s operations in Romania. In addition, he served as a director in Pacifica at the period referenced in the indictment. On January 30, 2007, Wald signed a preliminary agreement, on behalf of a Pacifica subsidiary, for the purchase of land in Izburan, Romania (hereinafter – the Izburan Deal). Part of the proceeds paid to the seller in the Izburan Deal were transferred from Pacifica through accounts belonging to Wald and to companies owned by him. By way of forgery and false representations, Wald caused Pacifica to transfer to him, in advance, hundreds of thousands of euros intended for the seller; Wald held those amounts for months before transferring them to the seller. After the Izburan land was placed under the ownership of Pacifica, the seller transferred to Wald’s

38 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.

165 bank account an amount of money, part of which represented Wald’s fee for the Izburan deal. Wald did no inform Pacifica of receiving the fee and the transaction was not approved by Pacifica using the approval mechanism prescribed by law for transactions with controlling shareholders. Following that, Pacifica issued an immediate report containing misleading details, since the immediate report it issued regarding the completion of the Izburan deal did not include any information as regards the fee which the seller transferred to Wald’s account. Under the second charge (against Pacifica, Shlomo Wald, Moshe Vaig, Yosef Antwarg, and Yoav Barak), Pacifica was accused of failure to comply with the provisions of Section 36 of the Securities Law and Periodic and Immediate Reports Regulations – in violation of Section 53(a)(4) of the Securities Law. Shlomo Wald, Moshe Vaig, and Yoav Barak were accused of this violation, in conjunction with violating Section 53(a)(4) of the Securities Law. Shlomo Wald and Moshe Vaig were accused of obtaining by fraud – a violation under Section 415 in conjunction with Section 29 of the Penal Code; of fraud and breach of trust in a corporation – in violation of Section 425 in conjunction with Section 29 of the Penal Code. Under this charge, Shlomo Wald was also charged with violations by officers and employees in a corporation – a violation under Section 424(1) of the Penal Code. Moshe Vaig is a businessman who is active in Romania, who represented Omega, a Romanian company which had agreements with Pacifica. During the period referenced in the indictment, Yosef Antwarg served as chairman of the board at Pacifica, and Yoav Barak served as the company’s CEO. Wald began negotiations with Pacifica, with the aim of acquiring two land plots in the city of Glatz, Romania. The negotiations were held with Moshe Vaig, representing Omega, who did not own the land plots at the time, but held concurrent negotiations to purchase the land plots from their owners (hereinafter – the Inheritors). During the negotiations it was agreed, with Vaig’s knowledge, that Omega purchase the land plots for €3.25 million per plot. At the same time, Wald and Vaig agreed that Pacifica would purchase the land plots from Omega for the amount of €5 million per plot, a transaction which would yield an expected profit of €2 million, to be shared by Wald and Vaig. Wald informed Pacifica’s board of directors of a potential deal to purchase the two land plots for the aggregate sum of €10 million. In a meeting held by the board of directors, Wald concealed the fraudulent plan he devised with Vaig, and the fact that Pacifica could purchase the land plots for a lower amount. Vaig and Wald worked together, receiving money – fraudulently with aggrevating circumstances – from Pacifica, committing fraud and breach of trust, thus harming Pacifica. The immediate reports issued by Pacifica regarding the purchase of the land plots included misleading details, as if the transactions were made directly with the land owners, and did not include the fact that there was no mechanism for securing the proceeds paid for the land plots. In

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addition, Omega used the funds received from Pacifica to purchase a third land plot, also in the city of Glatz, for which Wald was to receive a fee if the third plot were sold by Omega. Wald created false representations, according to which the agreements between Pacifica and Omega were made in accordance with the Romanian Law and as if a warning note was entered on behalf of the company. Wald caused Pacifica’s immediate reports to include misleading details so as to mislead reasonable investors. Barak and Antwarg were aware of the existence of material problems in the Glatz deal and were responsible for the fact that Pacifica refrained from reporting them. Under the third charge (against Shlomo Wald and Jacob Birnbaum), the two defendants were charged with violating Section 37 of the Securities Law, Periodic and Immediate Reports Regulations and Securities Regulations (Period for Submitting Notices Regarding Principal Shareholders or Senior Officers) of 2003 – in violation of Section 53(a)(4) of the Securities Law, and violating the provisions of Section 16(b) of the Securities Law – in violation of Section 53(a)(2) of the Securities Law. During the period referenced in the indictment, Jacob Birnbaum was a shareholder at Pacifica. In March 2007, Pacifica published a prospectus, in which it listed, inter alia, the company’s control structure. Following the publication of the prospectus, Pacifica reported the holdings of principal shareholders. In effect, the holding structure of principal shareholders at Pacifica during the prospectus period and following that period was different than reported. For example, some of Pacifica’s shares reported as Nat East shares were, in fact, held in trust by Wald for Birnbaum, who was not reported as a principal shareholder either at Nat East or Pacifica. Wald and Birnbaum did not file a notice with Pacifica, as required by law, as regards changes in holdings of principal shareholders, thus causing Pacifica’s principal shareholder holding report, as well as Pacifica’s financial statements for 2007-2008, to include misleading details, so as to mislead reasonable investors. In addition, Wald and Birnbaum caused the prospectus to include misleading details. In November 2011, the Tel Aviv District Court convicted Shlomo Wald based on his confession, as part of a plea bargain – see below in this chapter. In addition, the Court decided to terminate proceedings against Moshe Vaig due to his medical condition. Thus, an amended indictment was filed with the court which includes the other defendants. Criminal Case 410-02/11. In May, an indictment was filed with the Economic Department at the Tel .ב Aviv District Court against Efraim Kadetz, Eyal Eden, Keren Atia Sinai, Yaniv Atia, Hava Atia, and Nahum Gartner in suspicion of using inside information by an insider, a violation under Section 52c of the Securities Law. Elspec Engineering Ltd. (hereinafter – Elspec) is a public company traded on the Stock Exchange, which develops, manufactures, assembles, and markets products for improving the quality of electricity. At the

167 beginning of 2008, Elspec began developing a product aimed at complying with a new requirement issued by the Spanish government regarding the electricity market (hereinafter – the Via Var System). During the period between March 25, 2009 and April 5, 2009 – the date of the issue of the immediate report which announced the signing of agreements with the buyers for the provision and assembly of the Via Var system (hereinafter – the Immediate Report), information regarding the progress of negotiations, the preparations for signing the agreements, a trip made to Spain by Elspec’s CEO as part of the negotiations and signing of the deals constitutes “insider information” as defined by Section 52a of the Securities Law. The indictment accuses the defendants of three charges: In the first charge (against Efraim Kadetz) – during the period referenced in the indictment – Mr. Kadetz served as VP of marketing and sales at Elspec and deputy CEO. As a result of his position and role at Elspec, Mr. Kadetz constituted an “insider”. Mr. Kadetz made use of insider information by effecting a transaction: on April 2, possessing the insider information, he acquired Elspec shares, and following the issue of the immediate report, on August 9, sold those shares. In addition, Mr. Kadetz made use of inside information by delivering inside information when he conveyed the inside information in his possession to his friend Michael Steiner, knowing that – or having reasonable grounds to assume – that the latter will make use of the insider information. Steiner did, indeed, make use of the inside information prior to the issue of the immediate report. Under the second charge (against Eyal Eden, Keren Atia Sinai, Yaniv Atia, and Hava Atia), in the period referenced in the indictment, Eyal Eden served as head of the engineering department and was in charge of operations. As a result of his position and role at Elspec, Eden constituted an “insider”. Prior to the issue of the immediate report, having possession of the inside information, Eden made use of the inside information when giving 26 orders to purchase Elspec shares. In addition, Eden delivered his opinion that it was advisable to purchase the shares to his friend Avi Shpindler and his father in law Zeev Cohen, knowing or having reasonable grounds to assume, that they would make use of that inside information. The two did indeed make use of the inside information, purchasing Elspec shares prior to the issue of the immediate report. In addition, on March 28, 2009, during a family dinner, and at additional adjacent dates following that date, Eden delivered the inside information in his possession, as well as his opinion that it was advisable to purchase Elspec shares, to his mother, Hava Atia, his sister, Keren Atia Sinai, and his brother, Yaniv Atia, knowing or having reasonable grounds to assume that they will use that inside information. Under Section 52a of the Securities Law, Mr. Eden’s mother, sister, and brother constitute “insiders” at Elspec. The three did indeed make use of the inside information –

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purchasing Elspec shares when the inside information was in their possession. In addition, Ms. Hava Atia, Mr. Eden’s mother – having the inside information in her possession – recommended to her brother, Mr. Avner Rahamim, that he purchase Elspec shares, knowing or having reasonable grounds to assume that her brother make use of that inside information. Ms. Hava Atia’s brother did indeed use her opinion regarding the advisability of purchasing Elspec shares prior to the issue of the immediate report. Third charge (against Mr. Nahum Gartner) – in the period referenced in the indictment, Mr. Nahum Gartner served as head of acquisition at Elspec. As a result of his position and role at Elspec, Gartner constituted an “insider”. On April 1 and April 2, 2009, prior to the issue of the immediate report – having possession of the inside information – Mr. Gartner made use of the inside information when giving two orders to purchase Elspec shares. Mr. Gartner ordered the shares to be sold the day after the issue of the immediate report. Criminal Case 8256-09/11. ,In September, an indictment was filed with the Jerusalem District Court .ג in cooperation with the Economic Department at the Attorney General’s Office, against Mr. Freddy Algamil, Mr. Zeev Tenenbaum, Mr. Adia Ben Moshe, Mr. Mordechai Netanel, Mr. Udi Harari, Mr. Roni Bibi, Ms. Dalia Mizrahi, and Ms. Hani David on suspicion of violating the Securities Law, the Penal Code, the Prohibition on Money Laundering Law of 2000 (hereinafter, in this chapter – the Money Laundering Law) and the Sales (Apartments) (Assurance of Investments of Purchasers of Apartments) Law of 1973 (hereinafter, in this chapter – the Apartment Sales Law). A group of Heftsiba companies, under the management of Boaz Yona, dealt mainly with the initiation and construction of housing and commercial projects. The Heftsiba group of companies included a large number of privately held companies, publically traded companies and reporting corporations (hereinafter – the Heftsiba Companies). Mr. Freddie Elgamil, CPA, was deputy CEO of the Heftsiba Companies, serving as Mr. Boaz Yona’s close aid in managing and financing the companies. As part of his roles, Mr. Elgamil negotiated with banks in order to obtain financing for the Companies' operations, including the terms of the bank loans. Mr. Zeev Tenenbaum served as the Chief Financial Officer for the Heftsiba Group’s privately held companies. As of 2003, Mr. Adia Ben Moshe served as an economist at the Finance Department. Mr. Mordechai Netanel, CPA, was the Chief Financial Officer for one of the publically traded corporations in the Heftsiba Group. The three were responsible, as part of their roles, for the financial aspects of some of the projects, especially those related to the banks financing the projects. During the period referenced in the indictment, Mr. Udi Harari was head of the Sales Department and served as VP Marketing as of 2002. A

169 number of employees reported to Mr. Harari, including Ms. Dalia Mizrahi, who worked in the Sales Department at Heftsiba. Mr. Roni Bibi was Head of the Collection Department at Heftsiba during the period referenced in the indictment, with a number of employees reporting to him, including Ms. Hani David. The indictment accuses the defendants of five charges: The first charge (against all of the defendants) concerns violations as regards the sale of apartments in the projects. Mr. Tenenbaum, Mr. Elgamil, Mr. Ben Moshe, Mr. Netanel, Mr. Harari, and Mr. Bibi were charged with theft by agent – in violation of Section 393(2) in conjunction with Sections 383(a)(2) of the Penal Code and accepting an amount exceeding 15% of the price of an apartment, on account of the price of the apartment, without providing the buyer with a bank guarantee as security – in violation of Section 2 of the Apartment Sales Law. In addition, Mr. Tenenbaum, Mr. Elgamil, Mr. Ben Moshe, and Mr. Netanel were charged with falsifying corporate documents – in violation of Section 423 in conjunction with Section 29 of the Penal Code, and Mr. Harari and Mr. Bibi were charged with obtaining by fraud – in violation of Section 415 in conjunction with Section 29 of the Penal Code. In accordance with the instructions of Mr. Boaz Yona, Mr. Elgamil, and Mr. Tenenbaum – Mr. Harari, Ms. Mizrahi, Mr. Bibi, and Ms. David obtained funds from apartment buyers in a manner which would allow them to be deposited in accounts other than the loan accounts (when only monies deposited in the loan accounts are considered as actual payment for the purchased apartments, and only against which a buyer shall be provided with a collateral), so as to enable them to use the funds for various purposes other than financing the specific project where the apartments were purchased. Under these circumstances, Mr. Elgamil, Mr. Tenenbaum, Mr. Ben Moshe, Mr. Netanel, Mr. Harari, and Mr. Bibi obtained consideration for the apartments or parts thereof, while failing to provide guarantees or other alternatives, as required by Section 2 of the Apartment Sales Law. In order to disguise the ongoing theft of the buyers’ monies and continue it, Mr. Tenenbaum, Mr. Elgamil, Mr. Ben Moshe, and Mr. Netanel provided the lending banks and inspectors on their behalf with false representations. The second charge (against Mr. Tenenbaum) is concerned with money laundering and theft. Mr. Tenenbaum was charged with money laundering – in violation of Section 3(a) of the Money Laundering Law in conjunction with Section 29 of the Penal Code; performing a transaction with prohibited property – in violation of Section 4 of the Money Laundering Law in conjunction with Section 29 of the Penal Code; and theft by an officer – in violation of Section 392 in conjunction with Section 383(a)(2) of the Penal Code. In addition, Mr. Tenenbaum employed numerous means in order to disguise the source of funds he received from apartment buyers and the various activities and uses he made of them. Mr. Tenenbaum deposited funds of Heftsiba Construction and Investment Development Ltd. in his mother’s bank account, after which

170 he transferred the funds from his mother’s bank account to his own bank account. The third charge (against Mr. Tenenbaum and Mr. Natanel) is concerned with Heftsiba Jerusalem Gold Ltd. (hereinafter – Jerusalem), which was a publically traded company of the Heftsiba group. Tenenbaum was charged with theft by agent – in violation of Section 393(2) in conjunction with Sections 383(a)(2), Section 29, and Section 34b of the Penal Code and of obtaining by fraud under aggravated circumstances – in violation of Section 415 in conjunction with Section 29 of the Penal Code. Mr. Natanel was charged with theft by an officer – in violation of Section 392 in conjunction with Sections 383(a)(2) and Section 29 of the Penal Code; of obtaining by fraud under aggravated circumstances – in violation of Section 415 in conjunction with Section 29 of the Penal Code; failure to comply with the provisions of Section 36 – violations under Section 53(a)(4) in conjunction with Securities Regulation (Transaction between a Company and a Controlling Shareholder Therein) of 2001 (hereinafter, in this chapter – the Controlling Shareholder Regulations), the Periodic and Immediate Reports Regulations and Section 29 of the Penal Code; with falsifying corporate documents – in violation of Section 423 in conjunction with Section 29 of the Penal Code. Following Mr. Boaz Yona’s instructions, Mr. Tenenbaum embezzled, systematically, from time to time, funds from the Jerusalem bank accounts. The withdrawals from the Jersualem account represented extraordinary transactions between a publically traded company and a controlling shareholder therein, inter alia due to the fact that they resulted in violating a prospectus commitment as regards the designation of the proceeds of the offering. As a senior officer in a corporation, Mr. Natanel failed to immediately report to the Stock Exchange and the Israel Securities Authority as regards the funds withdrawals from Jerusalem. In addition, as part of a prospective deal for Jerusalem in Russia, Mr. Natanel published an immediate report containing misleading details regarding the deal, although he was aware that not all the material terms and conditions of the deal have been met and without confirming the details. Mr. Tenenbaum and Mr. Natanel created a false representation for Jerusalem’s accountants, whereby – inter alia – Jerusalem’s controlling shareholder had made no withdrawals from the company’s account. Mr. Natanel concealed material details in the periodic report for the first quarter of 2007, as well as in Jerusalem’s 2006 annual report. The fourth charge (against Mr. Tenenbaum, Mr. Ben Moshe, Mr. Elgamil) is concerned with violations committed in Heftsiba Chofim Ltd. (hereinafter – Chofim), which was a reporting corporation in the Heftsiba Group. Mr. Tenenbaum was charged with the same violations as in the third charge. Mr. Ben Moshe and Mr. Elgamil were charged with falsifying corporate documents – in violation of Section 423 in conjunction with Section 29 of the Penal Code and failure to comply with the provisions of Section 36 of the Securities Law – in violation of Sections 53(a)(4) and

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Section 53(e) of the Securities Law, in conjunction with the Controlling Shareholder Regulations, Periodic and Immediate Reports Regulations, and Section 29 of the Penal Code. Following Mr. Boaz Yona’s instructions, Mr. Tenenbaum systematically embezzled, from time to time, funds from the Chofim bank accounts. The withdrawals from the Chofim account represented extraordinary transactions between a publically traded company and a controlling shareholder therein, inter alia due to the fact that they resulted in violating a prospectus commitment as regards the designation of the proceeds of the offering. Mr. Tenenbaum concealed the withdrawal of funds so that the accountants would not enter them into the company’s financial statements. Mr. Elgamil signed, on behalf of Chofim, a document declaring that the company’s financial statements reflect adequate disclosure, and Mr. Ben Moshe concealed material details in the periodic report for the first quarter of 2007 as well as in Jerusalem’s 2006 annual financial statements. The fifth charge (against Mr. Elgamil, Mr. Tenenbaum, Mr. Ben Mosh, Mr. Netanel, Mr. Harari, and Ms. Bibi) is concerned with offenses by officers and employees of a corporation. The defendants were charged with offenses by officers of a corporation – in violation of Sections 424(1) and (2) in conjunction with Section 29 of the Penal Code, and of fraud and breach of trust in a corporation – in violation of Section 425 in conjunction with Section 29 of the Penal Code. The defendants systematically embezzled apartment buyers’ monies, violating the buyers’ authorizations and failing to deposit all of the purchase proceeds paid by the buyers to the projects’ loan account. All the while, Mr. Elgamil, Mr. Tenenbaum, Mr. Ben Moshe, and Mr. Netanel concealed their deeds, falsifying documents and making false representations to various entities. In addition, Mr. Tenenbaum and Mr. Netanel embezzled funds from the Jerusalem account and Mr. Tenenbaum embezzled funds from the Chofim account. All the while, both of them – along with Mr. Elgamil and Mr. Ben Moshe – used various means to conceal these deeds. Thus, the defendants caused the Heftsiba Companies to breach their commitments to apartment buyers. In addition, they executed their roles while committing fraud and breach of trust detrimental to a corporation. Criminal Case 14565-09/11. In October an indictment was filed with the Economic Department of the .ד Tel Aviv District Court against Netanel Sharon on suspicion of violating the Securities Law, the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law of 1995 (hereinafter, in this chapter – the Advice Law), the Penal Code, and the Money Laundering Law. In the period referenced in the indictment, Sharon served as an investment advisor and trader in the corporate trading room at the First International Bank. Mr. Sharon’s role, as an investment advisor in the trading room, included providing clients of the trading room with investment advice and securities trading services, in

172 accordance with their requests and requirements. As a result of his training, role and professional experience, Mr. Sharon was highly proficient in the capital market, including its various levels and characteristics, closely following the trading on the Stock Exchange. The indictment accuses the defendant of four different charges: The first charge – opening an account and performing illicit transactions by an investment advice licensee and an employee of a member of the Stock Exchange. Under his role, Mr. Sharon was prohibited from managing portfolios in accordance with Sections 2, 4 and 9(a) of the Securities Law and Section 52(i) of the Securities Law. According to the provisions of the Law, since Mr. Sharon was an investment advisor and did not possess a license to manage investment portfolios, he was prohibited from managing client portfolios and performing transactions in their accounts at his discretion. In addition, he was prohibited from doing so on account of being an employee of a banking corporation, which is prohibited from engaging in portfolio management. In addition, Mr. Sharon was prohibited from making securities transactions for himself, since he was in possession of an investment advice license. In addition, being an employee of a member of the Stock Exchange, he was subject to limiting conditions on performing securities transactions for the benefit of himself and his family members. Mr. Sharon approached his nephew, Mr. Eran Dagan, and his brother in law, Mr. Amir Dagan (for more information about their indictments, please see below in this chapter), offering them to open a joint securities account, under the name of his nephew, in order to take advantage of his knowledge and command of securities trading for the purpose of generating joint profits with funds deposited in the account by all those involved, through transactions he will perform in the account. The three agreed amongst themselves to share the profits engendered by the securities transactions according to their proporationate investments in the account. Mr. Sharon asked that the account be under his nephew’s name, so as to conceal the fact that he was one of its owners and beneficiaries. In accordance with the plan, an account was opened at the International Bank under the nephew’s name, with Mr. Sharon serving as the only active party in the account, which was run at his sole discretion, thus – in effect – managing an investment portfolio for his nephew and brother in law, in violation of the provisions of the Securities Law and Advice Law. The defendant’s deeds constitute a violation of Section 2(b) in conjunction with Section 39(a)(1) of the Securities Law; a violation of Section 9(a) in conjunction with Section 39(a)(3) of the Advice Law; a violation of Section 4(a) in conjunction with Section 39(b)(1) of the Advice Law; and a violation of Section 52i in conjunction with Section 53(b)(8) and (9) of the Securities Law. Second indictment – fraudulent activity in client accounts. As part of his job, Mr. Sharon served as a contact person at the trading room for

173 providing investment advice and performing securities transactions, for corporate and institutional customers as well as private clients with considerable scope of activity. In the period referenced in the indictment, Mr. Sharon performed transactions in an account under his nephew’s name, where he performed approximately 300 coordinated securities transactions between the account under his nephew’s name and the accounts of thirteen of his customers, without their knowledge or agreement. The transactions were disguised to be real, random transactions between knowledgeable, willing buyers, whereas – in reality – Mr. Sharon was behind them. Mr. Sharon coordinated the transactions, determining the number of shares and the price of the transactions while giving both the orders for the account and the coordinated orders for his clients’ accounts, so that they yield sure profits for his and his nephew’s account, and – in turn – cause sure losses to his clients. Trading in the account and the clients’ accounts was managed by Mr. Sharon at his sole discretion, with him taking advantage of his access to the clients’ accounts, the freedom of action granted to him and his clients' trust in him. In certain cases, Mr. Sharon approached his clients, persuading them to give him free reign to trade in securities in their account, raving about his abilities and successes in securities trading. Relying on his word, the clients agreed. Thus, the defendant fraudulently led them to believe that he would act in their accounts in their benefit. Thus, Mr. Sharon profited at the expense of his clients’ profits. In committing these deeds, the defendant violated Section 415 of the Penal Code, Section 393 of the Penal Code, Section 54(a)(2) of the Securities Law, and Section 425 of the Penal Code. Third charge – forgery. During the period referenced in the indictment, Mr. Sharon forged his nephew's signature on a large number of account documents, without being authorized to do so under law, in order to be able to use the account to perform various transactions, pretending that the latter were performed with the agreement of his nephew. Mr. Sharon fraudulently obtained, under aggravated circumstances, the Bank's assumption that the abovementioned documents had been lawfully signed. In addition, he received from the Bank an approval and authorization to perform the transactions in the account, which were requested using forged documents. In performing these deeds, the defendant violated Section 418 of the Penal Code, Section 420 of the Penal Code, and Section 415 of the Penal Code. The fourth charge concerns money laundering. Mr. Sharon had full control of the account under his nephew’s name, managed it, controlled the funds deposited and accrued in it as a result of the profits of his illicit activity and the violations he committed, enjoyed the revenues and profits from the account. Mr. Sharon withdrew the money accrued in the account through his relatives, rather than withdrawing it directly, so as to launder the money in the account. In performing these deeds, the

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defendant violated section 3(a) of the Money Laundering Law. Criminal Case 23192-10/11. In November, an indictment was filed with the Economic Department at .ה the Tel Aviv District Court against Mr. Avraham Levy, Mr. Golan Madar, Mr. Eliyahu Haelyon, Ofer Investments Ltd. (hereinafter – Ofer Investments), Ofer Development and Investment Ltd. (hereinafter – Ofer Development) and Melisron Ltd. (hereinafter – Melisron) on suspicion of violating Section 54(a)(1) of the Securities Law in conjunction with Section 29 of the Penal Code; Section 54(a)(2) of the Securities Law in conjunction with Section 29 of the Penal Code; Section 36 of the Securities Law and Periodic and Immediate Reports Regulations in conjunction with Section 53(a)(4) of the Securities Law and Section 16(b) of the Securities Law in conjunction with Section 53(a)(2) of the Securities Law. During the period referenced in the indictment, Mr. Avraham Levy, CPA, served as the CEO of Ofer Investments and as executive CEO of Ofer Development. In addition, he served as deputy CEO of Melisron and as a director in the Company, holding 3% of its shares. Mr. Golan Madar served as the Chief Financial Officer of Ofer Investment and – together with Levy – managed the financial matters of Ofer Development and Melisron. Mr. Eliahu Haelyon is an investment advisor who traded in bonds at the trading room of Poalim Sahar. Ofer Investment is a private company which invests in real estate, banking and hotels. Ofer Investment was the parent company of a group of companies which included, inter alia, Ofer Industrial Assets (Nazareth) Ltd., Ofer Sachaf Ltd., Ofer Development and Investment Ltd., among others (hereinafter – the Ofer Group). Ofer Development is a private holding company which forms part of the Ofer Group. Melisron is a public company traded on the Stock Exchange. Melisron rents and operates commercial and office buildings. In the period referenced in the indictment, the controlling shareholder at Melisron was Ofer Investment, which held 71% of Melisron’s stock. According to the facts of the indictment, Melisron conducted a private offering in February 2008, for the first time, of Series D bonds. In November 2009, Melisron reported that it is examining the possibility of making a second extended offering of the Series D bonds in December of the same year (the bonds were first extended in May 2009) through a uniform offer by way of a tender on the unit price. According to this method, the offering is made in two stages. In the first stage, a preliminary tender is conducted among institutional investors. In the second stage, the securities are offered to the public. The price of the security determined in the institutional investors’ tender represents the minimum price at the public tender stage. The offer of the investors in the first stage is influenced by the price of the security at the Stock Exchange. The higher the price of the security at the Stock Exchange, the

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higher the price that the investor will award the security in the tender. Thus, the amount of money raised in return for the company’s securities will be higher. Mr. Levy and Mr. Madar agreed to make use of the Ofer Group accounts in order to purchase Series D bonds prior to the institutional investors' tender, in order to cause the price of the Series D bonds to rise or prevent it from falling. As a result, the offers in the institutional investors’ tender and the minimum price of the Series D bonds determined at the public tender stage were expected to be higher. Prior to the institutional investors’ tender, Mr. Madar instructed Mr. Haelyon – with Mr. Levy’s agreement and knowledge – to perform trading transactions that would raise the price of the Series D bonds prior to the institutional investors’ tender or prevent it from falling. Under Mr. Levy and Mr. Madar’s instructions, Mr. Haelyon peformed transactions in the securities account of Ofer Development at Poalim Sahar in order to raise the price of the Series D bonds at the Stock Exchange or prevent it from falling, thus working together and fraudulently influencing the price of the Series D bonds. As a result of their actions in the days prior to the institutional investors’ tender, the price of the Series D bonds increased. During this period, Ofer Development purchased, with the funds of Ofer Investment, Series D Bonds in numerous transactions, in the amount of NIS 24 million. Criminal Case 23842-11/11. In December, an indictment was filed with the Economic Department at .ו the Tel Aviv District Court against Mr. Zvi Rabin, on suspicion of using inside information by an insider, in violation of Section 52c of the Securities Law, and against Mr. Guy Penn, on suspicion of making use of inside information received from an insider in a company, in violation of Section 52d of the Securities Law. Mr. Zvi Rabin is the founder of Kwan Communications (hereinafter – Kwan), a private company which provided communications services, public relations, investor relations and crisis management for companies both in Israel and abroad. In the period referenced in the indictment, Kwan’s clients included Evogene, Alvarion, Aladdin, and additional companies (hereinafter – Kwan Clients). Mr. Zvi Rabin served as CEO of Kwan, maintaining ongoing relations with the companies which constituted its clients. As part of his roles, he was responsible for investor relations. As part of his position and due to his ties with Kwan’s clients, Mr. Zvi Rabin constituted an “insider” in those companies. Mr. Guy Penn is an attorney by profession, and in the period referenced in the indictment, was one of the partners at attorney firm Penn-Almog which specializes in civil law, commercial law and litigation. The two defendants have known each other for many years, and have been close friends. The indictment accuses the defendants of five charges: First charge – on August 28, 2008, Evogene – a public company traded on the Tel Aviv

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Stock Exchange, which deals, inter alia, with plant trait improvement through bioltechnology – published two immediate reports, in which it announced, and provided details of, the signing of an investment agreement and a cooperation agreement with Monsanto, an American company which is a world leader in the production and marketing of technology-based seeds and agricultural products. On the day in which the immediate reports were published, the prices of the Evogene stock and options increased. The negotiations towards the signing of the agreements and signing them constitute “inside information” as defined by the Securities Law. Before the immediate reports were published by Evogene, Zvi Rabin became aware – as part of his work with the company – that the deals with Montesanto were about to be signed. Having that information in his possession, he performed transactions in Evogene securities, using the account of Ms. Michal Sonsino, who was – at the period relevant to the indictment – a book keeper at Kwan and Mr. Rabin’s life partner, so as to engender financial profits either for himself or for Ms. Sonsino. In addition, Mr. Rabin conveyed to Mr. Penn the abovementioned information. Shortly after receiving the inside information, and knowing that the source of the information is an Evogene insider and that the information has not yet been made known to the public, Mr. Penn performed transactions in Evogene securities in his account, so as to engender profits for himself. In addition. Mr. Penn conveyed the inside information to family members, knowing, or having reasonable grounds to assume, that they would make use of his opinion for performing transactions in Evogene securities. Mr. Penn’s family members purchased Evogene securities. Second charge – in April and May 2009, Evogene published three immediate reports. The first is concerned with a cooperation agreement between Evogene and Bayer, a German company and world leader in the marketing and production of seeds. The second report announced the Evogene had signed an agreement with Syngenta, a Swiss company and world leader in the field of seeds and pesticides, which was concerned with cooperation between the two companies. The third report contains a clarification as regards a story written by journalist Yoram Gabison, reaffirming its content – that Evogene signed an agreement with one of the world’s leading aircraft manufacturers for the purpose of testing a jet fuel substitute. Following these three immediate reports, the price of Evogene’s stocks and options increased. The negotiations for cooperation with Bayer, the negotiations for cooperation with Syngenta, the agreement with the aircraft manufacturer and the signing of these agreements constitute “inside information” as defined by the Securities Law. Having possession of the inside information, prior to the publication of the immediate reports, Mr. Rabin performed transactions in Evogene’s securities in Ms. Sonsino’s account, so as to enegender a financial profit either for himself or for Ms. Sonsino. In addition, Mr. Rabin conveyed the

177 inside information as regards the upcoming developments in Evogene to Mr. Penn. Shortly after receiving the inside information, knowing that the source of information is an insider at Evogene and that the information has not yet been made public, Mr. Penn performed transactions in Evogene securities in his account so as to engender profits for himself. In addition, he conveyed that inside information to family members, knowing – or having reasonable grounds to assume – that they make use of that opinion for the purpose of performing a transaction. Mr. Penn’s family members purchased Evogene securities. Third charge (against Zvi Rabin) – Aladdin Ltd. (hereinafter – Aladdin), a public company which traded on the Tel Aviv Stock Exchange and the NASDAQ until its sale to Vector Capital and subsequent delisting from the Tel Aviv Stock Exchange in April 2009. Aladdin was active in various fields, including in the development of copyright protection software. On October 16, 2008, Aladdin published an immediate report, in which it announced that its financial statements were issued abroad. On October 19, 2008, Aladdin published an immediate report featuring the content of its financial statements, which reported an increase in revenues in comparison with the same quarter in the previous year, and an additional immediate report in which it announced that Vector Capital has made an offer to acquire the company for the price of 14.5 dollars per share. The information regarding the publication of the company’s finanancial statements abroad and their content constitutes “inside information” as defined by the Securities Law. Prior to the publication of the immediate report, the information – or parts thereof – was made known to Zvi Rabin. Having possession of the information, he performed transactions in Aladdin’s securities in Ms. Sonsino’s account, for the purpose of engendering profits either for himself or for Ms. Sonsino. Fourth charge – Vector capital is a US-based fund which invests in private technology companies and in public companies which are traded – according to its assessment – at a discount. During 2008, Vector Capital began acquiring Aladdin Securities on the open market, and filed purchase offers for the acquisition of Aladdin’s shares. On January 7, 2009, Aladdin filed an immediate report, in response to a story by journalist Nir Zelik regarding the progress of Aladdin’s sale to Vector Capital, in which it announced that there were no grounds for the information and that the agreement has yet to be signed. On January 12, 2009, Aladdin filed an immediate report in which it announced its acquisition by Vector Capital. The price of Aladdin’s shares increased following each of the abovementioned immediate reports. The information about the story’s impending publication, the progress of negotiations between Aladdin and Vector Capital and Aladdin’s subsequent acquisition by Vector Capital constitute “inside information” as defined by the Securities Law. The information was made known to Mr. Rabin prior to the publication of the immediate reports. Having possession of the information, he performed transactions in Aladdin’s

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securities in Ms. Sonsino’s account, for the purpose of engendering profits either for himself or for Ms. Sonsino. In addition, Mr. Rabin conveyed the inside information to Mr. Penn prior to its publication and shortly after becoming privy to that information. Knowing that the source of the information is an Aladdin insider and that the information has not yet been released to the public, Mr. Penn performed transactions in Aladdin securities so as to engender profits for himself. Fifth charge – Alvarion is a public company traded on the Tel Aviv Stock Exchange, which manufactures wireless broadband systems. On June 17, 2009, Alvarion published an immediate report in which it reported – and coveyed details regarding – signing an agreement with Open Range, a US- based company which developed and installed wireless systems across the US, according to which Alvarion shall supply its wireless systems to Open Range for the purpose of laying a broadband communications infrastructure in the US. Following the immediate report, the price of Alvarion’s shares increased. Alvarion’s bid in the tender, its win and subsequest signing of the deal, the approval of the deal by the US Government and Mr. Golan Hazani’s story in Calcalist regarding the signing of the deal – all constitute inside information, as defined by the Securities Law. After Mr. Rabin was made privy to the information, and prior to its publication, he conveyed it to Mr. Penn. Shortly after receiving the inside information, and knowing that the source of the information was an Alvarion insider and that the information has not yet been made known to the public, Mr. Penn performed transactions in Alvarion securities in his account, so as to engender profits for himself. In addition. Mr. Penn conveyed the inside information to family members, knowing, or having reasonable grounds to assume, that they would make use of it for performing transactions in Alvarion’s securities. Mr. Penn’s family members purchased Alvarion securities. Criminal Case 37235-12/11. In December, an indictment was filed with the Economic Department at .ז the Tel Aviv District Court against Mr. Raphael Alon and Mr. Adi Shavit on suspicion of failure to comply with the provisions of Section 36 of the Securities Law and Regulations and on committing an offense by officers and employees of a corporation – an offense under Section 53(c)(8) of the Securities Law and Section 9 and 40(a) of the Periodic and Immediate Reports Regulations, as well as under Section 3 of the Securities Regulations (Preparation of Annual Financial Statements) of 1993 and an offense under Section 424(2) of the Penal Code. Tamam Integrated Recycling Industries Ltd. (hereinafter – Tamam) is a public company traded on the Tel Aviv Stock Exchange. Tamam provided treatment services for household, industrial and commercial waste. During the period referenced in the indictment, Mr. Alon, who founded Tamam, served as the company’s CEO and was a shareholder therein. As part of his role as the company’s CEO, Mr. Alon signed Tamam’s interim

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and annual financial statements. Mr. Shavit is a CPA by profession, who served as Tamam’s CFO. According the facts of the indictment, the defendants included misleading details in financial statements issued for 2003, 2004 and 2005 and created a misleading representation as regards Tamam’s financial performance, so that the financial statements failed to reflect Tamam’s true financial performance. Ram Zach Sanitation Ltd. (hereinafter – Ram Zach) was a privately owned company. In 1997, Tamam gave a loan to Mr. Jacob Negrin, one of the company’s principal shareholders, in return for an option to purchase Negrin’s shares at Ram Zach (30.4% of Ram Zach’s shares), for a period of five years. In 2002, it became known that Ram Zach was in serious financial difficulties, and that the value of the loan given to Negrin against his shares was higher than the value of his shares at Ram Zach, and that exercising the option was not economically worthwhile for Tamam. In addition, it became clear that if the option were not exercised, the company would not be repaid for the loan, since Negrin would not be able to repay the entire sum to Tamam. In accordance with accounting principles, if the borrower cannot repay a loan, the latter should be written off immediately from the company’s books – which would adversely affect the company’s balance sheets and its financial performance, resulting in an immediate loss in the amount written off. In order to refrain from an immediate write off of the loan amount, which was not repayable by Negrin, Tamam signed – through Mr. Alon and Mr. Shavit – a new set of agreements for the repayment of the loans, according to which the repayment shall be made in return for Ram Zach providing services to Tamam for a period of 48-60 months until the month of December 2007. In effect, Ram Zach provided services to Tamam for three months only, after which Ram Zach ceased its activity altogether. In accordance with accounting principles, the defendants should have written off – immediately upon learning that Ram Zach shall not be able to repay the loan amount, which had reached over NIS 4.5 million – this sum from the Tamam’s balance sheet. As aforesaid, such a write off would have increased Tamam’s losses for that year. In deciding to refrain from disclosing these material details for a significant period of time, being officers or employees of the corporation, thus harming the reliability of the corporation’s financial reports – the defendants harmed the proper management of the corporation’s affairs, In addition, Mr. Shavit included misleading details in announcements filed by the company with the Israel Securities Authority, including providing a misleading response to the ISA regarding the corporation’s financial statements. Criminal Case 6619-12/11. In December, an indictment was filed with the Economic Department at .ח the Tel Aviv District Court against Mr. Eran Roy Dagan and Mr. Amir Dagan on suspicion of assisting a member of the stock exchange in performing securities transactions – in violation of Section 52i in

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conjunction with Section 53(b)(8) and (9) of the Securities Law and Section 31 of the Penal Code, and of assisting in an activity prohibited for license holders – in violation of Section 4(a) in conjunction with Section 39(b)(1) of the Advice Law. Mr. Eran Dagan, Mr. Netanel Sharon’s nephew, and Mr. Amir Dagan, Mr. Sharon’s brother in law, enabled Mr. Sharon, a legal counselor at the First International Bank, to manage for them and with them, investments in a joint account under the name of Mr. Eran Dagan, thus assisting him in performing a prohibited activity by a licensee for investment advice (for more information regarding the Mr. Netanel Sharon’s indictment – please see above in this chapter). Beginning on the date in which the funds were deposited, Mr. Sharon managed securities portfolios for himself and for the defendants. Using the joint account under the name of Mr. Eran Dagan, he performed transactions in the account at his sole discretion, trading in securities despite the limitations and prohibitions which apply to him. The defendants did not close the account even after they withdrew funds from it, and Mr. Sharon continued to perform transactions in the account, performing thousands of securities transactions for himself, using the funds which remained in the account. Thus, the defendants enabled Mr. Sharon to continue performing securities transactions for himself, despite the limitations which applied to him. Criminal Case 56618-12/11. 2. Criminal cases pending in court As of the end of the year, a number of cases were pending decision in court, as follows: criminal cases were pending in trial court, including 37 indictments 45 .א filed in previous years. Two appeals are pending decision in the first appeals instance in the .ב district court. 3. Criminal verdicts in trial court During the year, eight sentences were handed down in trial court. In January, the Tel Aviv Magistrate Court convicted Mr. Tamir .א Feigenbaum based on his confession, as part of a plea bargain, of the charge of managing investment portfolios without a license, in accordance with Section 39(a) of the Advice Law. The defendant, who made investments in the capital market by trading in CFD financial instruments, performed transactions in the accounts of clients of Finotech Trading Inc., at his sole discretion, under a power of attorney given to him, while having no possession of a portfolio management license, as required by the Advice Law. The Court sentenced the defendant as

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follows: A seven month suspended prison sentence on the condition that the defendant not commit any offense under the Advice Law or any securities transaction; a fine of NIS 15,000 substitutable for four months in prison; the Court also required the defendant to sign a commitment of NIS 85,000, whereby he is not to commit any of the violations of which he was convicted nor trade in any security for twelve months from the date of the verdict. Criminal Case 36866-12/09. .In March, the Tel Aviv Magistrate Court acquitted the defendants Mr .ב Gad Zeevi, Mr. Gilad Rabinovitch, Mr. Yuval Eker, and Mr. Asaf Tiber. The defendants were charged with violations of obtaining by fraud under agrravating circumstances in accordance with Section 415 of the Penal Code, falsifying corporate documents in accordance with Section 423 of the Penal Code and including a misleading detail in a report or announcement filed with the ISA in accordance with Sections 53(a)(4) and 53(e) of the Securities Law. Mr. Zeevi, Mr. Rabinovitch, and Mr. Yuval Eker were acquitted of conspiring to commit a misdemeanor to obtain by fraud, of which they were charged in accordance with Section 499(a) of the Penal Code (for more information on the indictment, please see the 2006 Annual Report, p. 106, Section F). According to the indictment, the four defendants cooperated in order to obtain by fraud, under aggravating circumstances, the approval of a general meeting for the payment of the salary of Malam Systems Ltd.’s (hereinafter – Malam) Chairman of the Board, Mr. Gad Zeevi. The plan was realized by making a false and fraudulent classification of the vote under shares which were placed under lien to a bank against credit provided to companies under Zeevi’s control – classification made by Mr. Tiber in the general meeting which he conducted, and when reporting – on behalf of Malam – to the Israel Securities Authority, the Companies Registrar and the Tel Aviv Stock Exchange – a report which included a misleading detail as to the shares under lien being free from vested interest. The Court determined that classifying the shares under lien as shares untainted by vested interest was not false. Therefore, the approval provided by the general meeting as to the employment of Mr. Zeevi as chairman of the board and his monthly salary was not obtained by fraud. As a result, the Court determined that the Company’s reports to the Israel Securities Authority were not misleading. In addition, it was determined that there was no proof of a conspiracy between Mr. Zeevi, Mr. Rabinovich, and Mr. Eker to obtain by fraud the approval of the general meeting for the payment of Mr. Zeevi’s salary. Criminal Case 6932/06. .In April, the Tel Aviv District Court handed down the sentences of Mr .ג Sagiv Yohanan Netzia, Mr. David Netzia, and Mr. Nissim Rom based on

182 their confession, as part of a plea bargain. The Court convicted them, under an amended indictment (for information regarding the indictment, please see the 2009 Annual Report, p. 118, Section h). The Court convicted Mr. Sagiv Yohanan Netzia of five counts of obtaining by fraud – Section 415 of the Penal Code; two counts of falsifying corporate documents – Section 423 of the Penal Code; two counts of violations by management and employees in a body corporate – Section 424 of the Law; four counts of misleading reporting with the intention of misleading and failure to comply with the provisions of Section 36 of the Securities Law and the Periodic and Immediate Reports Regulations – a violation of Section 53(a)(4) of the Securities Law; failure to approve and report an extraordinary transaction with a controlling shareholder – a violation under Section 16 of the Controlling Shareholder Regulations; four counts of Money Laundering under Section 3(a); and four counts of Money Laundering under Section 3(b) of the Money Laundering Law. Mr. David Netzia and Mr. Nissim Rom were convicted of failure to comply with the provisions of Section 36 of the Securities Law and Periodic and Immediate Reports Regulations – Section 53(a)(4) of the Securities Law and Section 53(e) of the Securities Law. According to the indictment, Mr. Sagiv Netzia used his control of Orline, a publically traded company, which – according to its reports – dealt with entertainment electronics and later in investments, for the purpose of forging shares for his own profit. In order to carry out his fraudulent plan, Mr. Sagiv Netzia received by fraud the approval of the Stock Exchange to list for trading shares which were not allocated or paid for, and was charged that he included misleading details in the company’s reports for the purpose of misleading reasonable investors. In addition, Mr. Sagiv Netzia obtained by fraud the accountants’ assumptions regarding the representation of the company’s affairs in its financial statements and caused the reports filed with the ISA and Stock Exchange to include misleading details with the purpose of misleading reasonable investors, while falsifying corporate documents and acting fraudulently and with breach of trust which is detrimental to a corporation. In addition, according to the indictment, Mr. Sagiv Netzia falsely reported to the investing public – knowing that his reports were false and that the purpose of the reports was to cover up and disguise the superfluous shares. Mr. Sagiv Netzia attempted to unlawfully conceal and disguise the origin of property acquired through his fraudulent actions. Mr. David Netazia and Mr. Rom were convicted that in the period referenced in the indictment, they served as directors at Orline, despite the fact that they lacked the proper qualifications to be authorized to fulfil the roles awarded to directors of a company by law. In effect, Mr. David Netzia and Mr. Rom did not fulfil their roles as required. Mr. David

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Netzia signed the company’s financial statements and its board of directors’ report. In addition, they refrained from taking steps in order to prevent the company’s reporting violations, although they were required to have knowledge about them. The Court sentenced the defendants as follows: Mr. Sagiv Yohanan Netzia was sentenced to a period of five years in prison, 12 months of suspended sentence, on the condition that the defendant not violate – for a period of three years – Sections f and g of Chapter K of the Penal Code, in violation of Sections 36 of the Securities Law and Periodic and Immediate Reports Regulations, a violation of Section 53(a)(4) of the Securities Law, a violation of Sections 54(a)(1) of the Securities Law, a violation of Section 16 of the Controlling Shareholders Regulations, violations of Sections 3(a) or 3(b) of the Money Laundering Law; in addition, he was fined NIS 150,000 substitutable for two years in prison. Mr. David Netzia – a suspended sentence for a period of 12 months, on the condition that the defendant not commit – for a period of three years – a violation of Section 53(a)(4) and Section 53(e) of the Securities Law; he was fined NIS 20,000 substitutable for eight months in prison . Mr. Nissim Rom – a suspended sentence for a period of 12 months, on the condition that the defendant not commit – for a period of three years – a violation of Section 53(a)(4) and Section 53(e) of the Securities Law; he was fined NIS 20,000 substitutable for eight months in prison . Criminal Case 4218/09. In May the Tel Aviv Magistrate court sentenced Mr. Noam Reich, Mr. Dan .ד Kariv, Mr. Misha Krakowsky and Chim Nir Flight Services Ltd. Prior to that, in November 20120, the defendants were convicted, based on their confession, as part of a plea bargain, of charges in accordance with an amended indictment (for more information regarding the original indictment, please see the 2008 ISA Annual Report, p. 100, Section F). Defendant Noam Reich was convicted based on his confession, on charges of abetting fraud and breach of trust in a corporation, under Section 425 of the Penal Code in conjunction with Section 31 of the Penal Code; abetting failure to comply with the provisions of Section 36 of the Securities Law and Contolling Shareholder Regulations, under Section 53(a)(4) of the Securities Law in conjunction with Section 31 of the Penal Code; theft by an officer, in violation of Section 392 of the Penal Code, falsifying corporate documents under Section 423 of the Penal Code; obtaining by fraud under aggrevated circumstances, under Section 415 of the Penal Code; fraud and breach of trust in a corporation under Section 425 of the Penal Code; forging a document with an intent to obtain something under aggravated circumstances, under Section 418 of the Penal Code; violation of Section 36 of the Securities Law and Regulations thereof and causing to include misleading details in financial statements and immediate reports, under Section 53(a)(4) of the Securities Law. Defendant Dan Kariv was convicted based on his confession of violations of fraud and breach of trust in a corporation, under Section 425 of the

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Penal Code; violations of officers and employees of a corporation, under Section 424(2) of the Penal Code; obtaining by fraud, under Section 415 of the Penal Code, failure to comply with the provisions of Section 36 of the Securities Law under Section 53(a)(4) in conjunction with Section 53(e) of the Securities Law; violation of Section 36 of the Securities Law and Regulations thereof and causing to include a misleading detail in financial statements and immediate reports, under Section 53(a)(4) of the Securities Law. Defendant Misha Krakowsky was charged, based on his confession, of fraud and breach of trust in a corporation under Section 425 of the Penal Code; violations of officers and employees of a corporation, under Section 424(2) of the Penal Code; theft by an officer, under Section 392 of the Penal Code; falsifying corporate documents, under Section 423 of the Penal Code, obtaining by fraud under aggravated circumstances, under Section 415 of the Penal Code; failure to comply with the provisions of Section 36 of the Securities Law and including misleading details in financial statements and immediate reports under Section 53(a)(4) of the Securities Law. The Chim Nir corporation was convicted of two counts of failure to comply with the provisions of Section 36 of the Securities Law and regulations thereof – violations under Section 53(c)(8) of the Securities Law. The plea bargain included a maximum level of punishment, for which the State pleaded, and a minimum level of punishment, for which the defendants pleaded. The Court sentenced the defendants as follows: Mr. Noam Reich was sentenced to a period of 11 months in prison and a fine of NIS 50,000 substitutable for two months in prison; Mr. Kariv was sentenced to a period of nine months in prison and received a fine of NIS 80,000 substitutable for three months in prison; Mr. Krakowsky was sentenced to a period of 11 months in prison and received a NIS 100,000 fine substitutable for four months in prison; in addition, each of the defendants was sentenced to a suspended sentence of ten months, on the condition that they not commit any of the violations of which they had been convicted for a period of three years following their release from prison; In addition, as part of the plea bargain, the Chim Nir corporation was fined NIS 80,000. Criminal Case 1050/09. In July 2011, the State filed an appeal with the Tel Aviv District court against the sentences of Mr. Reich, Mr. Kariv, and Mr. Krakowsky (for details regarding the results of the appeal – please see below in this chapter). Application for Criminal Appeal 12482-07/11. In June, the Tel Aviv Magistrate Court convicted Mr. Oded Dessau of five .ה counts of failure to comply with the provisions of Section 36 of the Securities Law under Section 53(a)(4) of the Securities Law in conjunction with the Controlling Shareholder Regulations and Periodic and Immediate

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Reports Regulations; three counts of failure to comply with the provisions of Section 36 and 37 of the Securities Law under Section 53(a)(4) of the Securities Law and causing to include a misleading detail in an immediate report in conjunction with Regulations 33 and 36 of the Periodic and Immediate Reports Regulations; four counts of fraud and breach of trust in a corporation under Section 425 of the Penal Code; theft by an officer under Section 392 of the Penal Code; failure to provide disclosure and misleading publication by a senior officer in a corperation under Section 424(a)(a)(1) of the Penal Code; and subornation in a lawful investigation under Section 245(a) of the Penal Code. According to the indictment, between August 2005 and June 2006, when the defendant served as chairman of the board at Golan Fine Crafts (1977) Ltd. (hereinafter – Golan), a public company traded on the Stock Exchange, and was its controlling shareholder, he committed violations of the Securities Law and Penal Code. The first three charges in the indictment dealt with withdrawals of Golan funds by the defendant to his accounts and for his personal needs. The fourth charge dealt with a loan agreement between the defendant and Mr. Joe Shapira – the defendant gave Mr. Shapira the right to convert the loan to half of his holdings at Golan for the period of the loan. The fifth charge also dealt, similarly to the first three charges, with withdrawals from Golan’s account made by the defendant for his personal needs. However, unlike in the first three charges, the funds were not returned to Golan’s account. The sixth and seventh charges deal with a false representation made by the defendant to the board of directors and other corporate organs at Golan, as well as to the Company’s CPAs and legal counsel, according to which Mr. Dessau had formed a deal to acquire shares at Lime & Stone Marble Ltd. According to that representation, the USD 4.8 million withdrawal made by the defendant from Golan’s account (the sum of all withdrawals included in the fifth charge) was for the purpose of financing the deal and given to Mr. Yitzhak Klepper, who was a party to the deal. Following the representation and information provided to Golan by the defendant, Golan issued three immediate reports which included information about the deal and its financing. Regarding the subornation in a lawful investigation charge, the defendant conducted a meeting with Mr. Klepper, during which the two spoke about the misleading representation that the defendant provided to Golan and the Israel Securities Authority, according to which he gave Klepper the proceeds of the deal in the amount of USD 4.8 million. The Court convicted the defendant of all charges: Regarding the first three charges, it was determined that the withdrawals from Golan’s account made by the defendant and the transfer of the funds for his personal needs constituted extraordinary transactions between a publically traded company and a controlling shareholder therein, thus

186 constituting transactions that are outside the corporation’s ordinary course of business and requiring approval by the audit committee and board of directors. In addition, the withdrawals required the approval of a general meeting and an immediate report to be filed with the Israel Securities Authority and the Stock Exchange, in accordance with the requirements of the Controlling Shareholder Regulations and Periodic and Immediate Reports Regulations. The defendant refrained from obtaining the approval of the Company’s organs, and – in effect – concealed the withdrawals from the Company’s organs. In addition, the defendant refrained from reporting the withdrawals/transactions to the Israel Securities Authority and the Stock Exchange. Regarding the fourth charge, it was determined that the conversion right provided by the defendant to Shapira caused the possible realization of the transaction to result in a significant change in the holdings of principal shareholders at Golan. The defendant refrained from reporting the agreement to Golan officers, to the Israel Securities Authority and to the Stock Exchange, as required by law. Thus – knowingly and intentionally – the defendant concealed from the ISA and the investing public the option provided to Shapira and the company under his control – to become half of the controlling shareholders at Golan had they exercised the conversion option. In addition, the defendant was responsible for the fact that the immediate reports published on behalf of Golan included false details. The Court determined that in the fifth charge as well, the defendant did not obtain the approvals required for the withdrawal of funds performed by him, and refrained from issuing the official required report so as to conceal the withdrawals from the board of directors, principal shareholders and investing public and mislead them. In addition, the defendant failed to return the aforementioned funds to Golan’s account. Regarding the sixth and seventh charges, the Court determined that the representation provided by the defendant to the board of directors and Golan’s organs – according to which he had formed a deal to acquire holdings at Lime & Stone Marble Ltd. and the deal was nearing closure, and that the amount of USD 4.8 million was intended to finance the aforementioned deal and was given to Mr. Itzhak Klepper – constituted a false representation and was intended to mislead them. The defendant was responsible for the fact that the immediate reports published by Golan regarding the deal to acquire holdings at Lime & Stone Marble Ltd. included false and misleading details regarding the designation of the funds he unlawfully withdrew from Golan’s account, and the defendant acted with the aim of misleading reasonable investors. In addition, the Court determined that the defendant tried to prevent Mr. Klepper from testifying against him to the Israel Securities Authority in case of an investigation, and also attempted to cause Mr. Klepper to provide investigators with a false statement, according to which he

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received USD 4.8 million from the defendant and returned the funds to him. In October the Court sentenced the defendant as follows: 24 months in prison; 12 months suspended sentence, on the condition that the defendant not commit – for a period of three years following his release from prison – a felony under the Securities Law, as well as theft by an officer under Section 392 of the Penal Code; nine months’ suspended sentence, on the condition that the defendant not violate – for a period of three years from his release from prison – a violation of the Securities Law and failure to disclose information and misleading publication by an officer in a corporation, under Section 424a of the Penal Code, as well as fraud and breach of trust in a corporation, under Section 425 of the Penal Code; six months suspended sentence, on condition that the defendant not commit – for a period of three years following his release from prison – subornation in a lawful investigation; the defendant was also fined NIS 100,000, substitutable by six months imprisonment. Criminal Case 6493/07. In September, the Tel Aviv Magistrate Court convicted Mr. Oren Sarusi .ו and Mr. Ori Ben Naftali of committing securities fraud under Section 54(a) of the Securities Law, on abetting to commit securities fraud under section 54(a) of the Law, and convicted Oranit Securities Ltd. (hereinafter – Oranit) of committing a securities fraud violation under section 54(a) of the Law. In some counts, the defendants were charged under Subsection 54(a)(1), and in others – under Subsection 54(a)(2) of the Law; while in others – under both subsections. Nonetheless, each conviction regarding a transaction was considered a conviction on a single count, even if the conviction was made under both subsections. According to the indictment, during 2002-2004, the defendants performed transactions in four different securities, with the aim of fraudulently raising prices (or barring the fall of prices) by self dealing transactions or coordinated transactions. In addition, the defendants committed fraud by creating a false representation of trading, without significant influence on the price, thus creating an artificial trading cycle, also by self dealing transactions and coordinated transactions. Mr. Sarusi and Mr. Ben Naftali were licensed in investment portfolio management and investment advice, and served – during the period referenced in the indictement – as officers at Oranit, and as portfolio managers for Oranit customers and in its accounts. The defendants were charged with two kinds of illicit activity: (a) activities performed with, for, or opposite Mr. Herzl Orsalmi (Mr. Orsalmi was originally indicted with the two defendants, confessed and convicted based on his confession, and sentenced); (b) activities performed on behalf of the defendats’ clients or in Oranit’s own account. The Court determined that the defendants acted together and in concert in securities trading, for the

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purpose of influencing the prices of those securities – to cause them to increase or prevent them from decreasing, and in order to create a false impression of significant trading volumes between independent parties. They created a false price and a false trading cycle and also created a false representation of proper activity in securities. All actions were performed in order to prompt the public to perform transactions in these securities and to do so at higher prices than they would have done without the defendants’ intervention. In December, the Magistrate Court sentenced the defendants following their conviction: Oren Sarusi – 20 months in prison; a fine of NIS 45,000 substitutable for four months in prison; a suspended sentence of four months, on the condition that the defendant not violate the Securities Law for a period of three years from the date of the sentence. Ori Ben Naftali – 20 months in prison; a fine of NIS 45,000 substitutable for four months in prison; a suspended sentence of four months, on the condition that the defendant not violate the Securities Law for a period of three years from the date of the sentence. The Oranit corporation was fined NIS 10,000. Criminal Case 8073/06. In October, the Tel Aviv Magistrate Court acquitted – due to insufficient .ז evidence – the defendant Mr. Meir Dor of the use of inside information by an insider – according to the indictment – under Section 52c of the Securities Law (for more information regarding the indictment, please see the ISA 2009 Annual Report, p. 117, Section e.). According to the indictment, the defendant, who served as the Chairman of the Board at Tefen Industrial Engineering and Management and Systems Analysis Ltd. (hereinafter – Tefen), a public company traded on the Stock Exchange, made use of inside information. A week prior to the publication of Tefen’s periodic reports for the third quarter of 2003 – which reflected an adverse change in the company’s financial performance – he gave an order to sell his personal holdings at Tefen. The adverse change in Tefen's performance was not known to the general public at the time when the defendant sold his shares. The main dispute at court was on the issue of whether at the time the defendant sold his Tefen shares he had insider information as regards its financial performance for the third quarter of 2003. The Court acquitted the defendant due to insufficient evidence, being unconvinced that the convicting conclusion was clearly superior to the optional thesis, whereby the defendant had no inside information at the time he sold his shares. In such circumstances, it was impossible to determine that the defendant’s guilt was proven beyond reasonable doubt. Criminal Case 14419/09. In October, the Tel Aviv District Court (Economic Department) sentenced .ח Mr. Yaacov Kaufmann, based on his confession, as part of a plea bargain, of violations attributed to him in the amended indictment. According to the plea bargain, the defendant’s wife, Yerushalaim (Jessy) Kaufmann,

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was stricken from the indictment. The Court convicted Kaufmann of obtaining by fraud under aggravated circumstances, numerous counts of theft by agent, numerous counts of fraudulently influencing price fluctuations of securities, a violation under Section 54(a)(2) of the Securities Law and fraud and breach of trust in a corporation. In addition, the defendant was charged with violations of the license requirement under the Advice Law (hundreds of counts); prohibited portfolio management in a bank under the Advice Law (hundreds of counts); prohibited action by a licensee under the Advice Law (hundreds of counts); and trading in securities by a Stock Exchange member under Section 52h in conjunction with Section 53(b)(8) and (9) of the Securities Law (hundreds of counts). According to the indictment, beginning on October 1, 2007, and until the opening of the investigation in July 2009 – while the defendant was employed as an investment advisor – he acted, at this own discretion, in accounts of clients who asked for his investment advice services, thus managing, in effect, his clients’ portfolios although he was not licensed to do so and although it was prohibited by law. Unsatisfied with unlawfully managing his clients’ portfolios, the defendant embezzled funds from the bank's clients by performing numerous self trading and coordinated transactions – 1,373 such transactions – between his private accounts and clients of the bank’s trading floor. In doing so, the defendant illegally profited, at the expense of his clients, causing them financial losses. In addition, he exposed the public to false trading data, created a false representation of significant and proper activity in securities, while artificially influencing the price of a security, in addition to abusing the trading system and the trust placed in him by the bank. The Court sentenced the defendant to 22 months in prison; a fine of NIS 35,000 substitutable by nine months of imprisonment; a suspended sentence of 15 months in prison on condition that the defendant not commit – for a period of three years following his release from prison – any of the violations of which he was convicted. Criminal Case 51462-12/10. (In November, the Tel Aviv District Court (Economic Department .ט convicted Mr. Shlomo Wald, based on his confession, as part of a plea bargain, of those violations of which he was indicted (for more information regarding the indictment, please see above in this chapter). In the first charge, Mr. Wald was convicted of forgery under Section 418 of the Penal Code; obtaining by fraud – three counts under Section 415 of the Penal Code; fraud and breach of trust in a corporation – three counts under Section 425 of the Penal Code; failure to comply with the provisions of Section 36 of the Securities Law and Regulatiosn thereof – in violation of Section 53(a)(4) of the Securities Law). In the second charge, Mr. Wald was convicted of fraud and breach of trust in a corporation –

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three counts under Section 425 of the Penal Code; failure to comply with the provisions of the Securities Law and Periodic and Immediate Reports Regulations under Section 53 of the Securities Law; and of violations by officers and employees of a corporation under Section 424(2) of the Penal Code. In the third charge, Mr. Wald was convicted of failure to comply with the provision of Section 37 of the Securities Law and the provisions of Section 16(b) of the Securities Law under Section 53 of the Securities Law. Criminal Case 410-02/11. 4. Verdicts in criminal appeals During the year, the District Court handed down one verdict in a criminal appeal: In November the Tel Aviv District Court, serving as a criminal appeals .א court, accepted the State’s appeal against the sentence awarded to Mr. Noam Reich, Mr. Dan Kariv, and Mr. Misha Krakowsky, by the Magistrate Court (for more information regarding this verdict, please see above in this chapter). The District Court reached the conclusion that the total punitive result reached by the lower court (i.e. – the combination of the different punitive components: Imprisonment and fine) was inappropriate and merits the intervention of the appeals court. According to the Court, since the lower court was satified, in the present case, with a shorter period of imprisonment, the punishment is to be balanced by serious fines. Thus, the Court reinstated the original imprisonment term, including the suspended sentences (Reich – 11 months in prison and one month of suspended prison sentence; Kariv – nine months in prison and ten months of suspended prison sentence; Krakowsky – 11 months in prison and ten months of suspended prison sentence) and raised the fines. Reich was fined NIS 400,000; Kariv was fined NIS 300,000; and Krakowsky was fined NIS 800,000. Application for Criminal Appeal 12482- 07/11.

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XI INVESTIGATIONS AND INTELLIGENCE DEPARTMENT The Investigations and Intelligence Department implements the policies of the ISA’s Chairman regarding deterrence as well as streamlining the processing of investigation files. This activity included improvement of the investigation processes in general and, in particular – decreasing the time elapsed between the existence of a prima facie suspicion that a violation has been committed to the start of an overt investigation, and until the final findings stage and transfer of the case to the District Attorney’s office. In 2011, the Investigations and Intelligence Department identified and investigated a number of events regarding securities trading in institutional entities, in which senior officers and employers allegedly engaged in fraudulent activity. In addition, the Department located and investigated events in which individuals related to controlling shareholders of publically traded companies engaged in activities suspected as securities fraud. After the Streamlining of ISA Enforcement Procedures Law – which allows for administrative probes – went into effect, the Department began implementing and applying the Law. In 2011, as part of the ISA's strategy to become involved in the globalization process, the Department continued to respond to foreign authorities requesting judicial inquiries in accordance with treaties signed by the ISA In addition, cooperation between the ISA’s Investigations and Intelligence Department and other enforcement agencies continued to increase, as well as cooperation with Israeli enforcement agencies, as part of their efforts to defeat economic criminal activity. Table 26: Cases forwarded to the Department of Investigations and Intelligence in the past five years, by type of violation .1 2. Type of violation 2007 2008 2009 2010 2011 Total Securities fraud 1 2 4 4 4 15 Use of inside information 3 2 6 2 4 17

39 Inclusion of misleading information 2 5 4 7 1 17 (in prospectuses, financial statements or immediate reports)

40 Delinquent filing and non-filing 1 1 – – – 4 Judicial inquiries 8 7 9 13 6 43 Violations by employees of Stock – – 1 Exchange members and prohibited

39These data include two files which have been split off existing cases. 40These data include the “Heftziba Affair”, in which additional offenses of the Penal Law and Prohibition on Money Laundering Law were investigated under special authorization.

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acts by a licensed investment 1 – – portfolio manager Disciplinary violations 1 – – – – 1 Violations under the Joint 1 – 1 – – 2 Investment Trust Law Violations under the Penal Code: – – 2 1 2 5 bribery, theft, obtaining by fraud

41 42 Total 18 17 26 27 17 105

In 2011, the first administrative probe cases were opened, and transferred to the Investigations and Intelligence Department. Table 27: Administrative probes transferred to the Investigations and Intelligence Department, by type of violation Type of violation 2011 Violations of the Advice Law 1 Violations of the Securities Law 3 Total 4

Table 28: 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

43 2007 2 9 11

44 2008 4 16 20 45 2009 0 12 12

46 2010 3 9 12

41These data include three files which have been split off existing cases. 42These data include one file which has been split off an existing case and do not include administrative probes opened during the year. 43These data do not include five cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency.

44These data do not include two cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 45These data do not include seven cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency.

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47 2011 1 14 15 Total 10 60 70

Table 29: Distribution of investigation cases forwarded to the District Attorney's Office in the past five years, by main type of violation Type of violation 2007 2008 2009 2010 2011 Total Securities fraud 3 4 3 3 1 14 Use of inside information 3 6 4 4 3 20 Inclusion of misleading 3 4 4 3 2 16 information (in prospectuses, financial statements or immediate reports) Offenses by an employee of a 1 – – – – 1 stock exchange member Delinquent filing and non– 3 1 – – – 4 filing Violations under the Penal 1 2 2 3 3 11

Code: bribery, theft, obtaining by fraud Offenses under the Joint – 1 – 1 – 2 Investment Trust Law Total 14 18 13 14 9 68

As of the end of the reporting year, the Investigations and Intelligence Department has nine pending cases, where investigation is still ongoing. In addition, six judicial inquiries are still pending.

46These data do not include 11 cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 47These data do not include seven cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency.

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XII International Affairs Department 1. General 2011 marked the continued influence of political and economic changes on capital markets – mainly the Eurozone crisis and the Arab Spring uprisings. Instability led financial regulators worldwide to acknowledge the need to continue addressing crisis conditions and develop adequate plans to handle risks, while examining capital markets around the world and increasing cooperation and coordination among nations. The latter is done, inter alia, under the auspices of international forums such as the IOSCO and OECD, on issues of both regulation and supervision of capital markets and cooperation in enforcing securities laws as well as sharing information. The International Affairs Department participated in these discussions, inter alia in order to draw lessons and implement steps relevant to the Israeli capital market, mutatis mutandis, which the ISA is authorized to take. In addition, the International Affairs Department led efforts to promote the position and image of the ISA and the Israeli capital market in the international arena, as a state of the art, progressive capital market with up to date, effective regulation. 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 international 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. At the beginning of 2011, the IOSCO decided, for the first time since its inception, to institute a dramatic reorganization. As part of this process, two former committees (the Technical Committee and Executive Committee) will be merged into a single committee entitled the IOSCO Board. The latter will, in fact, be the most significant board in the organization and will be responsible for planning its course of action. Between 2012 an 2014, a temporary transitional board will be in charge of managing the organization, until the permanent IOSCO board is established in 2014.

During the year, the Department participated in the following events and programs held by the IOSCO:

 The IOSCO Annual Conference: This conference is considered one of the most significant and prestigious events in the global economic regulatory community. This year, the conference was held in Cape Town, South Africa. Discussions focused on the manner in which securities regulators handle

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systemic risk, on reducing reliance on credit rating agencies, shadow banking, trading in derivatives, as well as the IOSCO’s strategic directions.  Leading the IOSCO MMOU Monitoring Group: This year, the head of the Department was elected chairman of the work group in charge of implementing the IOSCO’s Multilateral Memorandum of Understanding concerning Consultation, Cooperation and Exchange of Information (hereinafter – the IOSCO MoU or the MoU) between the authorities which are party to the MoU (more than 80 authorities), after three years during which she served as Deputy Chairman of the Group.  The EMC WG4 work group handling enforcement and information sharing issues under the IOSCO MoU : The Department takes part in a number of the working group’s projects, such as proposals to amend the MoU and providing interpretations for various enforcement and information sharing issues.  Participation (as observers) in the IOSCO European Regional Committee enabled the Department to strengthen the ISA’s ties with European securities authorities and their parent organization (the CESR), and to position the ISA as progressive and in line with European financial legislation. This year, the International Affairs Department participated in all meetings held by the committee and presented to it, on a number of occasions, various aspects of the Israeli regulation. The International Affairs Department continues to advance its joining this Committee as a full member, so as to promote and strengthen the ISA’s position as a progressive and leading regulatory body which acts in accordance with European financial standards and is at the forefront of international regulators.  IOSCO MMOU Screening Group: Since becoming a member of this prestigious forum in 2007, the ISA takes an active part in the screening and approval of IOSCO members wishing to join the IOSCO MoU . The Group holds in-depth discussions regarding the legal infrastructure in countries wishing to join the agreement vs. the IOSCO’s strict criteria for cooperation. During the reporting year, the ISA took part in three meetings held by the group, leading a number of projects and handling a number of applications to join.  Participation in a meeting of the TC SC6 Committee, which handles the issue of credit rating agencies: The International Affairs Department takes part in a working procedure for regulating supervision over Israeli rating agencies, and has participated in one meeting of this committee so as to get a full, updated picture of developments which have taken place in this field worldwide.  Staffing a secondment position in the IOSCO secretariat: For the first time, a representative of the ISA took a position with the IOSCO secretariat, for a year. During the reporting year, the representative, an attorney who works at the International Affairs Department, served as a consultant specializing in the implementation of the IOSCO MoU.  Emerging Markets Committee (EMC): The ISA participated in the discussions held by the Committee and held meetings with its senior team as well as with senior IOSCO officials to enhance its involvement in the IOSCO’s work. The

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head of the Department took part in the Committee’s annual conference, which was held in the Dominican Republic and held a presentation regarding the Bahar Reform in the Israeli market, which won accolades. In 2011, the ISA was mainly active as part of the task force on the tradable bonds market: The ISA took part in meetings and a task force, writing material which is to be included in the final report.  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 discussion regarding IFRS decisions. The ISA’s team dealing with this issue was an active participant in these discussions (as well as representatives from Australia, New Zealand, Switzerland, Portugal, France, the UK, Germany and other countries), and continued to position itself as an active player in the area of IFRS. In addition, the team prepares accounting enforcement decisions to be posted on the IOSCO website. So far, nine decisions of the Israel Securities Authority have been uploaded, the last of which – on the subject of associates – was uploaded in December 2011. In addition, the Department is active, along with the Corporate Finance Department, in a working group dealing with accounting, auditing and disclosure (TC SC1), which discusses the most significant issues in this area worldwide. 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 conducted a member survey in five countries, including Israel, in which the regulation of interested party transactions and quality of actual rule enforcement was examined. As part of the member survey, the Department delivered to the Organization’s secretariat – in cooperation with the Ministry of Justice – a “self evaluation report” on the subject of regulation and supervision practices of interested party transactions in Israel. In addition, a representative of the OECD secretariat arrived for a visit in Israel, conducting meetings on the issue with market players as well as representatives of the Israel Securities Authority and academia members. The Department represented Israel – along with the Ministry of Justice – in an open discussion conducted by the committee. The results of the member survey were published in a report in which the OECD surveys the steps taken by Israel in the past few years in order to improve the protection of the interests of minority shareholders. According to the report, during the past two years, the Israeli authorities took a variety of steps to enhance the already effective legal framework in order to prevent the abuse of shareholders in general, and in particular – as regards interested party transactions. The report notes, inter alia, the establishment of the Economic Department at the Tel Aviv District Court and the Administrative Enforcement Law. In addition, it also noted the ISA’s ability to take enforcement measures in cases of negligence as well, where the burden is proof is lower than in criminal enforcement procedures.

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In addition, the report notes Amendment 16 to the Companies Law, which strengthened the position of minority shareholders regarding the approval of interested party transactions, enabling the Israel Securities Authority to assist in financing derivative claims, as well as the extensive disclosure and reporting requirements for companies as regards interested party transactions in general and controlling shareholder transactions in particular. In addition to the above, the report notes that the issue of business groups continues to be the focus of public discussions in the Israeli economy. The report concludes that the legal framework in Israel provides extensive support and protection to the interests of shareholders. The report states that Israel has adopted many of the OECD principles relevant to interested party transactions, and has one of the best developed disclosure and supervision systems amongst OECD member countries which were examined in this respect. The inter-ministerial steering committee, which was established as part of the joining process, continues to work and is developing a work plan for the purpose of coordinating Israel’s activity with the organization. The ISA – through the International Affairs Department - is a member of the steering committee and is actively involved in its meetings. 3. Financial Sector Assessment Program (FSAP) In November 2011, a delegation of the International Monetary Fund (IMF) arrived in Israel in order to conduct an assessment of the financial sector in Israel (FSAP). The latter is an extensive procedure which examines the stability of the financial sector and quality of supervision thereof in light of international standards, as well as whether the existing infrastructure enables it to function properly. This assessment procedure was conducted by a delegation of experts specializing in capital markets, banking, insurance, payment systems, clearing, etc. The delegation visited Israel for a period of two and half weeks, during which its members met with numerous senior government officials, including the Minister of Finance, the Governor of the Bank of Israel, the Chairman of the Israel Securities Authority, the Capital Markets Supervisor and the Supervisor of Banks, as well as with a number of institutions and privately owned entities in each sector. The assessment of the Israel Securities Authority was conducted by representatives of the International Monetary Fund, in accordance with a methodology developed by the IOSCO, which includes a set of 38 principles which serve as a comparative scale to the desirable modus operandi of a securities regulator. As a part of a preliminary procedure which preceded the arrival of the delegation in Israel, the International Affairs Department answered – during a period of several months – an extensive questionnaire which examines the Israeli market in light of the abovementioned principles (a self assessment process). The Israel Securities Authority was fully assessed for meeting 29 principles (one was excluded from the survey). It was also assessed, without being graded, in relation to the eight remaining principles lately adopted by the IOSCO, regarding the ISA's readiness to adopt these principles. The principles according to which the Israel Securities Authority was assessed include, inter alia, enforcement standards, supervision over the secondary market, supervision of intermediaries, supervision of issuers, supervision of mutual funds and cooperation.

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• The scores were assigned using a scale which includes one of the following assessments for each principle: fully implemented, broadly implemented, partly implemented, not implemented, not assessed. The Israel Securities Authority received the following scores: Fully implemented 23 principles Broadly implemented 3 principles Partly implemented 2 principles Not implemented 1 principle N/A 1 principle

According to an international comparison between Israel’s results and the results obtained by leading securities regulators around the world, Israel has received the highest score (“fully implemented”) more often than any other regulator. Chart 11: IMF comparison between the ISA and leading regulators around the world

USA 15 Sweden UK Netherlands 10 Germany Israel 5

0 Not Assessed Not partly Broadly Fully Implemented Impleneted Impleneted Impleneted

The final report produced by the International Monetary Fund is due to be issued in March 2012. However, its initial findings, as delivered to the International Affairs Department for comments, are extremely positive and demonstrate that, internationally speaking, the ISA’s performance and the level of regulation it maintains are in line with the world's leading securities regulators. Summary of initial findings: • Regulating principles: The Israel Securities Authority acts in accordance with a clear mandate. Its authority and purview are defined by law and it possesses the powers necessary to fulfill its roles. The ISA enjoys a high level of independence, and its level of reporting and accountability vis a vis the government, the Knesset, and the public

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are considerable. Nevertheless, the report stipulates that the Minister of Finance's level of involvement in the ISA’s activity is to be reconsidered. In this context, the report notes the Minister’s excessive involvement in legislation, his power to approve prospectuses and authority to approve standards. • Principles pertaining to Self Regulatory Organizations (SROs): Having the authority to approve and supervise its members, as well as market activity and clearing activity, the Tel Aviv Stock Exchange fulfills a significant role as an SRO. The Stock Exchange possesses the power necessary to fulfill its roles, including the authority to impose disciplinary sanctions. The Israel Securities Authority possesses extensive powers to oversee the activity of the Stock Exchange. • Enforcement principles: The Israel Securities Authority possesses extensive powers needed in order to obtain information, and possesses the power necessary to ensure compliance with the laws under its purview. The entities under its supervision are under extensive requirements as regards record keeping. The ISA possesses extensive power to investigate administrative and criminal violations of the Securities Law and impose sanctions in cases of administrative violations. The ISA is an active regulator which performs extensive, well organized supervisory activity that includes use of sophisticated technologies to detect violations of the law. • Cooperation principles: The Israel Securities Authority possesses powers to share information with both local authorities and foreign authorities regarding issues under its purview. The ISA has signed 19 memoranda of understanding with foreign authorities. In addition, it is party to the IOSCO Multilateral Memorandum of Understanding concerning Consultation, Cooperation and Exchange of Information. There is evidence of its activity and cooperation under those memoranda. • Principles regarding Issuers: The issue of securities to the public in Israel mandates the publication of a prospectus approved by the ISA. The disclosure requirements by which prospectuses are bound are in line with the IOSCO’s principles. The ISA has extensive powers to enforce compliance with reporting requirements and required standards. Special requirements are in place for interested party transactions and changes in control, and the ISA places particular emphasis on protecting minority interests. Nevertheless, there is a weakness in terms of the underwriting activity in Israel, which is not regulated or supervised. • Principles regarding mutual funds: There are clear rules for the activity of the funds and their legal structure, such as the requirement to appoint a trustee. There are detailed requirements for the evaluation of the funds’ assets and for determining unit prices, as well as complete transparency as regards these issues. • Principles regarding intermediaries: The ISA licenses investment portfolio managers, investment advisors and investment marketers, and has the power to ascertain that they meet licensing requirements. License holders are bound by extensive regulatory requirements, and the ISA actively supervises license holders’ compliance thereto. The Stock Exchange has the power to approve its members and supervises non-bank Stock Exchange members (banks are under the supervision of the Supervisor of Banks). Nevertheless, the regulation of broker-dealer activity is amiss, as it is carried out by non members of the Stock Exchange and does not include the provision of investment advice. • Principles regarding secondary market activity: The Tel Aviv Stock Exchange is the only secondary market in Israel and is under the supervision of the ISA, which

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possesses extensive powers to ensure that the Stock Exchange meet regulatory requirements. The ISA is very involved in decision making processes at the Stock Exchange and implements an effective supervision plan thereof. Market trading is characterized by transparency. The ISA has direct power to identify incidents of inside information use and other trading manipulations, for which it uses an impressive technological system. 4. Bi-lateral recognition At the beginning of the reporting year, the European Securities and Markets Authority (ESMA) decided to recognize the Israeli regulation regarding the content and format of a prospectus in accordance with the Securities Law. The significance of this decision is that an Israeli prospectus, with the addition of several details, may be filed in all 27 EU countries, for the purpose of listing publically traded Israeli companies on European stock exchanges. The recognition of Israeli regulation is a precedent in the European Union. It is the first time that the ESMA has exploited the newly acquired power granted to European regulators under the European Prospectus Directive (2003/71/EC) and Transparency Directive (2004/109/EC) to recognize as equivalent regulation regimes outside Europe. The decision to recognize Israel represents a positive indication regarding the nature and quality of the Israeli regulation. The ESMA decision stipulates that an Israeli prospectus shall be deemed valid in European countries, provided that it includes an addendum (WRAP), which contains additional disclosure information, apart from that which is required in Israel, in accordance with the specific agreement with the host country. The addendum is to include a list of disclosure details required in addition to those required by Israeli authorities, such as a declaration by those responsible for the preparation of a prospectus that all the necessary precautions to ensure the reliability of information included therein have been taken. The addendum should also include balance sheets and audited financial statements for the past three years (in lieu of the Israeli requirement to append annual balance sheets for the past two years), etc. For the ESMA declaration regarding its recognition of the Israeli regulation regarding prospectuses, please visit: http://www.isa.gov.il/Download/IsaFile_5615.pdf For the document explaining the additional required disclosures, please visit: http://www.isa.gov.il/Download/IsaFile_5617.pdf In continuation to this decision, the International Affairs Department was active in seeking cooperation agreements with European Union regulators and signing bi- lateral recognition agreements with them. In particular, the ISA is making progress on this matter with the British Financial Services Authority, the FSA. The two regulators are developing principles under which they will engage in a bi-lateral recognition agreement.

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Engaging in such bi-lateral recognition agreements with European Union regulators will provide Israeli companies with access to new markets and a range of foreign investors. 5. Signing agreements for cooperation on information exchange Signing an agreement with the PCAOB .א

In October 2011, in continuation to negotiations led by the International Affairs Department, a cooperation and information exchange agreement was signed between the Israel Securities Authority and the PCAOB (Public Company Accounting Oversight Board). The PCAOB is a supervisory body which was established in 2002 by the United States Congress, in accordance with the Sarbanes-Oxley Act. The role of the PCAOB is to supervise independent auditors of publically traded companies in the United States, as well as broker-dealer companies, in order to ensure the reliability and quality of the financial statements that are issued to the public and audited by independent auditors. The American Securities and Exchange Commission (SEC) appoints all members of the PCAOB board of directors, supervises its activity on an ongoing basis, and approves its budget. In addition, as part of its roles, the PCAOB supervises independent auditors of companies that are dually listed in Israel and the United States. The agreement allows the SEC and the ISA to request non public information regarding auditors under their supervision, in accordance with the laws authorizing the two entities. The agreement stipulates that, in any case, the use of information provided under the agreement shall be subject to the laws and power bestowed by the relevant law and regulations. The agreement sets strict confidentiality requirements regarding the provided information. In addition, it sets a number of exclusions required by law. The agreement enables the parties to end the commitment at any time, ensuring that the parties continue to comply with their secrecy obligations even if they decide to end the agreement as aforesaid. The agreement with the PCAOB aims to strengthen existing cooperation between the ISA and the PCAOB and enhance it in favor of the Israeli investing public. The agreement reflects the ISA’s commitment to consider taking measures so as to strengthen the position of independent auditors as effective gatekeepers, so as to ensure the quality of the auditing process and financial reporting in Israel. Signing an agreement with the China's Securities Regulatory Commission .ב (CSRC) In March 2011, a memorandum of understanding was signed between the Israel Securities Authority and China's Securities Regulatory Commission (CSRC) for cooperation on enforcement and information exchange. The agreement was reached following negotiations led by the International Affairs Department. The memorandum of understanding stipulates that the two authorities will assist each other in enforcing their countries' securities laws. The assistance will be provided as part of administrative enforcement activities. In addition, assistance for the purpose of civil or criminal enforcement may be extended, subject to written preapproval by the assisting authority.

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The agreement opens up Israel’s capital market to investments by Chinese institutional investors and China’s capital market to Israeli institutional investors. Chinese regulation stipulates that the existence of a bi lateral cooperation agreement with a foreign securities authority is a prerequisite to authorizing foreign institutional investors to invest in the Chinese market, and vice versa. The Israel Securities Authority views the opening of Israel’s and China's capital markets to mutual investments as strategically significant. As part of the execution of the agreement and promotion of mutual investment opportunities, the International Affairs Department intends to post on the ISA website an explanatory paper regarding investing in China as qualified financial institutional investors. 6. 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 study trips abroad: Study delegation on regulation of oil and natural gas – the Department organized a study seminar in Alberta, Canada, to study regulation, supervision, and reporting principles of discovery, development and extraction of natural gas and oil resources. The seminar included employees of the Corporate Finance Department. Participants met with regulation entities, securities exchange officials and industry players. Study delegation to FINRA – the Department organized a study seminar with the FINRA (Financial Industry Regulatory Authority) in the United states, which included employees of the Investment Department, for the purpose of learning FINRA’s supervisory model as an SRO in the US market, its powers and relationships with the Securities and Exchange Commission and market players. FINRA is the largest independent regulator in the US, responsible for broker-dealer companies and independent brokers in the US. Its purpose is to protect American investors. A delegation to examine administrative enforcement models in Europe – the Department organized a study tour for the Administrative Enforcement Department and Legislation Department, with the aim of preparing for the implementation of the Streamlining of ISA Enforcement Procedures Law at the Israel Securities Authority. As part of this tour, study meetings were held at the FSA and the French securities authority, the Autorité des marchés financiers (AMF). The meetings focused on accepted administrative procedures. Study delegation to the US capital market – as 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. Study delegation on supervision methods, focusing on technology, to the FSA and LSE – the Department initiated and organized a study tour for the Information Systems Department and Department of Supervision over the Secondary Market for study and update purposes.

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7. Cooperation on enforcement and exchange of information The ISA attaches great importance to this issue: Integrating the ISA into cooperation processes between entities supervising and enforcing securities laws. The ISA deems this vital to meeting its enforcement goals. An increasing number of investigations conducted by the ISA require information and activity outside Israel, and in order to obtain optimal results, the Department cooperated with foreign authorities which are party to the IOSCO Multilateral Memorandum of Understanding concerning Consultation, Cooperation and Exchange of Information. In addition, the Department handled requests for information and assistance in judicial inquiries by foreign authorities which are not party to any agreement with the ISA. Activity under the IOSCO MoU, its main points and parties thereto .א One of the main elements of the ISA’s enforcement activity is its being party to an agreement under the multi lateral cooperation agreement between foreign authorities which are members of the IOSCO. Presently, 80 authorities are party to the IOSCO Agreement, 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 of the IOSCO MoU 1. Mutual assistance and exchange of information between authorities shall be for the purpose of enforcement and supervision of the laws of the requesting authority. Assistance is to include the gathering, seizing and transfer of information and documents to foreign authorities, as well as 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 subjects: ;Inside information, market manipulation, false reporting (א) ;Listing, issuing, offer or sale of securities and reporting requirements thereof (ב) Market intermediaries, including licensed or registered investment advisors, joint (ג) investment brokers, dealers and transfer agents; .Markets, stock exchanges, clearing houses, and settlement entities (ד) 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), Astonia, Australia, Austria, Bahrein, Belgium, Bermuda, Brazil, British Columbia (Canada), BVI, Bulgaria, the Cayman Islands, China, Croatia, Cyprus, the Czech Republic, Denmark, Dubai, Finland, France, Germany, Greece, Guernsey Island, Hong Kong, Hungary, Iceland, India, Isle of Man, Israel, Italy, Japan, Jersey Island, Jordan, Kenya, Korea, Lichtenstein, Lithuania, Luxembourg, Macedonia, Malaysia, the Maldives Islands, Malta, Mexico, Montenegro, Morocco, the Netherlands, New Zealand, Nigeria, Norway, Ontario (Canada), Pakistan, Poland, Portugal, Quebec (Canada), Romania, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa,

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Spain, Sri Lanka, Srpska, Sweden, Switzerland, Syria, Taipei, Tanzania, Thailand, Tunisia, Turkey, the UK, Uruguay, the US, West African Monetary Union. (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 the requests for assistance, the Department organized, in cooperation with the Intelligence and Investigations Department, delegations of researchers for discussions and consultations so as to enhance cooperation between the ISA and foreign authorities. 8. Regulation of custodians In December 2011, the Inter-Ministerial Committee for Reviewing Custody Services in Israel issued its final recommendations. It concluded that custody services in Israel require regulation. This Committee, which was chaired by the Head of the Department, was comprised of representatives from the Israel Securities Authority, the Finance Ministry, the Bank of Israel, the Ministry of Justice, the Stock Exchange and the Israel Tax Authority. The Committee found that custody services in Israel were not uniformly and adequately regulated – a situation which allows for variance in the quality of such services provided to Israeli investors. The report issued detailed recommendations for extensive, systemic regulation of the custody field in Israel, for each of the three financial regulators (the ISA, the Bank of Israel, and the Ministry of Finance). The Committee recommends applying such requirements to any entity providing custody services for securities and financial assets, whether directly or indirectly. a. The Committee’s key recommendations A custody service provider’s basic duties – these duties include safekeeping ownership interests in clients’ assets and cash and safekeeping those interests accompanying asset ownership. Segregation of assets, record keeping, requirement to perform reconciliations and reporting requirements – imposing a set of duties and setting procedures so as to enable distinct identification of client assets, ongoing monitoring of assets and registration of ownership interests therein, as well as enabling clients to keep track of their assets; Handling clients’ cash – applying principles for handling cash of a custodian’s clients, which ensure the adequate safeguarding of the cash; Appointing a third party custodian and ongoing monitoring of that custodian – imposing binding requirements as regards the selection of a third party custodian, and for ongoing monitoring of that custodian so as to safeguard the basic interests and rights of clients;

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Liability for failings or damages – a liability rule for failings or damages is to be regulated by law. However, the Committee recommended that this issue be included in an agreement between an intermediary and a third party custodian, and serve as a consideration when selecting a third party custodian; Utilizing client assets in transactions – the Committee set conditions which are to be met in order for a custodian or intermediary to utilize client assets in transactions; External auditing – carrying out an external, independent audit in the custody service field, to be carried out at least once a year, in which record keeping of assets and cash under custody are to be examined, as well as the system of internal procedures and controls; Regulation, supervision and enforcement – the regulator in charge of custodian services or intermediaries shall ensure that regulation, supervision and enforcement of the Committee’s recommendations are carried out. As aforesaid, each of the regulators shall examine and implement the issue of supervision and supervision roles. The Israel Securities Authority regards the implementation of the Committee’s recommendations as a further step towards improving the Israeli capital market and its functioning. 9. Activity as part of the Committee for Implementing the Prohibition on Investing in Corporations Dealing with Iran Law The aim of the Prohibition on Investing in Corporations Dealing with Iran Law of 2008 is to prevent investments by Israeli financial institutions in corporations that have material business relations which contribute economically – whether directly or indirectly – to Iran. The Law is part of the international effort to prevent Iran from developing unconventional weapons which threaten the existence of the State of Israel. An inter-ministerial implementation committee was formed under the Law, charged with drawing a list of corporations having material business dealings with Iran. Under the Law, financial institutions are prevented from investing in corporations included in the list published by the Committee. The Israel Securities Authority, through the International Affairs Department, is a member of the implementation committee, contributing to developing the aforesaid list.

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XIII Information Systems 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 and underwriters. The system is designed so as to harness electronic communications technology and the internet to service the investing public and the 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 the supervision over the reliability of information; and to provide new analysis tools. Since the date in which the system first became fully operational (in November 2003) and until the end of 2011, thousands of authorized signatories have signed up to use the system, 711,452 different reports were handled, including 113,893 in 2011 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 different 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 those submitting the reports and information security. It has even won a number of prestigious IT excellence awards. For the sixth 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 2011, 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 tested prior to being activated. The external supplier was also tested for

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compliance with the SLA (service level agreement). In 2011, five versions – which featured 160 system changes – were implemented and tested.

Table 30: MAGNA activity data for 2011 Number / Type of data volume Total reports submitted through MAGNA – annual 113,893 Total volume of reports for 2011 32.25 GB Public reports submitted through MAGNA – annual 92,395 Non-public reports submitted through MAGNA – annual 21,498 Total reports submitted through MAGNA – Israeli corporations 81,887 Total reports submitted through MAGNA – annual – dual-listed corporations 2,801 Total reports submitted through MAGNA – annual – mutual fund managers 24,348 Total reports submitted through MAGNA – annual – underwriters and underwriting firms 370 Total reports submitted through MAGNA – annual - investment advice companies 185 Total reports submitted through MAGNA – annual – investment portfolio managers 3113 Total reports submitted through MAGNA – annual – investment marketing firms 381 Total reports submitted through MAGNA – annual – mutual fund trustees 420 Total reports submitted through MAGNA – annual – purchase offerors which are not publically traded companies 123 Total reports submitted through MAGNA – annual – banks as employers of investment advisors 253 Total reports submitted through MAGNA – annual – bond trustees 12 Total active forms on MAGNA 395 Total active forms on MAGNA – Israeli companies 143 Total active forms on MAGNA – dual-listed companies 27 Total active forms on MAGNA – mutual fund managers 100 Total active forms on MAGNA – mutual fund trustees 16 Total active forms on MAGNA – investment advisor firms 19 Total active forms on MAGNA – investment portfolio managers 23 12 Total active forms on MAGNA – annual – banks as employers of

208 investment advisors Total active forms on MAGNA – underwriting managers 25 Total reports submitted through MAGNA – annual – purchase offerors which are not publically traded companies 11 Total active forms on MAGNA – investment marketers 19 Total active signatories in the system 1,910

Main activities in 2011: Infrastructure upgrades .א Due to technological progress and new software and hardware products on the market, the Department started to develop the MAGNA system’s third generation. The Department upgraded the information distributors’ website using a new technology and began developing a new distribution website. The development phase is nearing completion, and the new site is expected to be launched in the first quarter of 2012. The reporting, form, interface and administrative websites are also expected to be completed in 2012. In addition, ongoing urgent infrastructure upgrades were performed – such as support for Microsoft’s new browser, Internet Explorer 9, newly launched operation systems, etc. Reinforced information security .ב Following a directive issued by the Approver Registry at the Ministry of Justice, and in light of information security risks, which have worsened over time, the information security and electronic signature system has been revised. While in 2010 the focus was on the reporter side, in 2011, the MAGNA system’s own security systems were changed, including identification components, signature approval, and prevention of break-ins and unauthorized access. New maintenance tender for MAGNA .ג The current agreement with the external service provider for the MAGNA system about to expire in the middle of 2011, the ISA issued a tender for the selection of a substitute provider, which would continue to provide these services over the next few years. The tender ended successfully, with the ISA signing an agreement with the winning provider for the continued development and maintenance of the system over the next five years (with an option to extend the contract for three additional years). (Trading platforms and exchange-traded notes (ETNs .ד Due to legislative changes, infrastructure for new entities was created as part of the MAGNA system: trading platforms and exchange-traded notes (ETNs), as preparation for these entities’ reporting requirements becoming effective. In addition, the Department began the definition and characterization stage of

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the relevant reporting forms. This activity is due to be completed in 2012, depending on the completion of related legislative procedures. MAGNA system administration .ה Another MAGNA-related field is system administration and the handling of reporting entities and persons authorized to report, including those applying for authorized person status. This year, the ISA processed approximately 1,440 forms authorizing or canceling authorized signatories and certificate extension applications; 61 new entities were registered, and 233 detail update forms were processed. During the year, 67 entities changed their names, and 289 entities updated their details on the 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 22 cases of closing corporations and other entities which ceased qualifying as reporting entities, improved its database concerning principal shareholders and replied to inquiries and questions submitted by reporting entities. Additionally, approximately 2,500 identification number verifications were carried out, mainly for advisor licensing applicants. 2. Document archiving and automated office The system allows 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 archives electronic 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 2011: a. Email archive With the growing number of ISA employees over the past few years and the increased volume of employees’ emails on the one hand, and the wish to preserve information availability for an unlimited period of time on the other, a sophisticated email archive was set up, which enables the ISA to store employee emails and retrieve information quickly and efficiently as necessary. b. Improved server redundancy In 2011, the Department completed the server redundancy project, which enables automatic transition between servers in case of failure. This ensures

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that in case of software or hardware failure, the system will not shut down, since alternative hardware and software will be activated. b. Lotus version upgrade This year, the Department carried out a massive upgrade of the entire system to Version 8.5.2, which includes new and improved capabilities for emailing, scheduling, work groups, etc. In addition to the upgrade, the system was converted to an advanced roaming method, which enables ISA employees to enter the system from any workstation, working simultaneously and transparently. A user can work out of his/her regular working environment and computerized office, out of workstations in the Jerusalem site, Tel Aviv site, remotely from home or via mobile phone. Connecting the Securities Department at the Tel Aviv District Attorney's Office Following the transfer of the Securities Department at the Tel Aviv District Attorney's Office (hereinafter – the Securities Department) to new offices in Tel Aviv, the Department created a third computer site, which includes computers infrastructure, standard information systems, workstations, a communications system, and printers. Employees of the Securities Department now have full access to all ISA systems, as at the two older sites. E. Task management During 2011, the Department integrated into the computerized office environment a new task management system on a departmental level, team level and individual employee level. The system is able to aggregate tasks and provide a full picture of tasks' progress, as well as detailed information regarding each task. Infrastructure upgrade During the last quarter of 2011, the Department upgraded the system's infrastructure, replacing all dated servers in each site with new servers, and implementing an advanced operation system and an innovative storage system. The Department completed a complex process of upgrading and exchanging the infrastructure within a very short period of time, without causing system downtime or any disruption to users‘ work.

3. Operational system During 2011, 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 2011, approximately 720 requests for system changes and improvements were carried out, covering a broad range of issues.

Main activities in 2011: New IT developments carried out in 2011 are as follows: Creating debts for corporations and funds based on accrued annual debt; building a basis for

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producing vouchers with magnetic font; building a database for supporting the Foreign Service Providers Registry; unifying all review procedures for approving a license, including all phases thereof; creating a new warning system for controlling random mid-month reports; handling index products for the Investment Department.

4. The ISA website During the year, the ISA website (www.isa.gov.il) was regularly updated with new content: information on new legislation and regulations, news and publications, updated supervised-entity lists, and FAQs.

Main activities in 2011: Addition of a page regarding the ISA in Arabic and Russian; improvement of the website content upload mechanism for the benefit of its users; a list of advisors – personal data was added as well as details regarding foreign service providers; updated value of fund assets, statistical information regarding managers' fees – addition of a capability to produce data in Excel, including historical data; activation of a hotline to the Intelligence and Investigations Department, which enables the public to provide the Department with information.

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. This year, a total of 164,503 information items were collected and fed into the system. Since the system was first installed, a total of 1,454,702 were fed into it.

6. Computing for the Investigations and Intelligence Department a. Forensic computing system The Investigations Department's advanced forensic computing system was built approximately three years ago, and has proven itself fully. The improvement and streamlining of the Investigations and Intelligence Department's activities are apparent and almost every case includes a large amount of information and documents uncovered during investigation. The system includes a server and 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 Systems Department implemented a large scale upgrade of the forensic system's storage system to a more advanced and quicker version. In addition, storage capacities were

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increased, in order to address current needs and the increase in input volume created as part of investigations. b. Vault At the Investigations and Intelligence Department's request, the Information Systems Department has purchased a “vault” for the secure transfer of documents and information between the ISA and banks, and is in the process of integrating the system. 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 system was activated on a pilot basis with some banks, and mechanisms were established that enable automatic receipt of input from the vault directly at investigators' workstations. c. Entity-relationship system At the Investigations and Intelligence Department's request, and with the cooperation of its staff, the Information Systems Department participated in the characterization, identification of needs and preparation of an RFP for an entity-relationship system. The system will serve the Investigations and Intelligence 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 is due for publication in the first quarter of 2012.

6. Forms and payments system During 2011, additional ISA online forms were uploaded to the Government payments server, activated by TEHILA. The forms are intended for use by various sectors in order to access the ISA on different issues. In 2011, approximately 13,000 forms were submitted and payments totaled approximately NIS 12 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 – its reliability and availability were improved, and the level of information security was raised.

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

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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 dated and no longer meets current needs. Thus, it was decided to set up a new information system to research trading data at the ISA, according to 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. Phase A was launched at the beginning of January 2011, and the massive development of additional modules continued throughout the year. Main activities in 2011: Phase D, which was launched in February, included: Unequivocal .א identification table from the Ministry of Finance; new irregularities; an identifier group activity chart; investment irregularities; funds dashboard, new reports for funds; “Portfolio managers’ world”. ,Phase E, which was launched in June, included: Rate calculations .ב conversion of unequivocal identifiers; establishment of an “off-market trading world”; new irregularities for the Investment Department; new reports for the Investigations and Intelligence Department; a “payment world”; improvements of the display of the funds dashboard. Towards the end of October, Phase F of the system was activated, which .ג includes: improvements to the supervision of trading area and intermediaries’ irregularities; updating of identifier reception from the Ministry of Finance; handling of Exchange Traded Notes (ETNs). Towards the end of the reporting year, Phase G of the system was .ד activated, which includes: Handling of new indexes; interested parties; new reports; ETN dashboard; portfolio manager dashboard. 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. Furthermore, ISA employees hold much knowledge requiring documentation, such as email documents and correspondences, undocumented phone calls, insights, etc. In 2011, the ISA prepared and issued a public tender for the development and implementation of the system. A winning service provider was selected, following which the ISA and the winning service provider signed an agreement for the development and maintenance of the system for a period of five years. A detailed characterization of the various processes followed, and the development of the software and preparation of infrastructure were initiated. The system’s development and full activation is due to be finalized in 2012.

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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 2011, the Department collected information on requirements and needs, and prepared an RFP for the system. The tender was published in the first week of 2012, and the system is expected to be finalized in the last quarter of the year.

11. Human resources system At the request of the Secretary General, and in cooperation with the administration staff, the Information Systems 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. In 2011, the winner of the tender was selected, and the Department managed the system implementation project: Characterization of the requirements and needs, software development, building, creating interfaces, training and implementation. On January 1, 2012, the Human Resources Department fully transitioned to the new system.

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.

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Shortly before the vote, the voting system transfers to the company – through the YAEL system – the results of the online shareholders' meeting (this is done so that the company can determine whether there is a quorum for conducting the meeting). At the end of the process, the online meeting data, voting process log and results of the online meeting votes are transferred to the ISA archive, as are other data. In addition to the technical implementation of the project, a legislative process is underway. The latter is to support the various processes, timing and activity of the system. The two courses of action are needed in order to activate the system. The Department began developing the project and conducted a general and detailed characterization of the system’s processes. It purchased the necessary hardware and began the development phase. The development phase is expected to be finalized in 2012.

13. Infrastructure: servers, communications, and information security During 2011, extensive improvements were made to the ISA's IT infrastructure. These included: Upgrading of server infrastructure and storage equipment in both ISA .א 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 .ב Tel Aviv) with advanced components. The upgrading of various information security tools protecting the ISA .ג against break-ins, malware of various kinds and viruses. Ongoing maintenance of all systems, procedure updates, and SLA control .ד for both internal and external users. .Continued updating of all outdated PCs, printers and operating systems .ה Project of transitioning from Novell to Microsoft environment. During .ו 2011, the ISA began preliminary steps for an extensive conversion project of all ISA infrastructure into Microsoft environment. The Department purchased the necessary hardware, mapped and converted software used by ISA employees as well as infrastructure control mechanisms. The project will be finalized in 2012, with every ISA department converting to the new environment. The above activities, and particularly those concerning the upgrade of the information security system, will continue throughout 2012.

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תרשים 1: קרנות לפי הסיווג כשיעור מנכסי Chart 1: Funds classified according to הקרנות percentage of funds’ asset value

מניות בארץ Israeli shares קרן כספית Money market fund אג"ח בארץ - שקליות Israeli bonds – NIS אג"ח בארץ - מדינה Israeli government bonds אג"ח בארץ – חברות והמרה Israeli bonds – corporate and convertible אג"ח בארץ - כללי Israeli bonds – general אג"ח בחו"ל Foreign bonds אחר Other

תרשים 2: מספר קרנות הנאמנות Chart 2: No. of trust funds in 2007-2011 2011-2007 מספר קרנות No. of funds

.1 תרשים 3: שווי נכסי קרנות הנאמנות Chart 3: Asset value of trust funds in 2011- 2007 (במיליארדי ש"ח) (in NIS billions) 2007-2011 שווי נכסי קרנות הנאמנות (במיליארדי ש"ח) Asset Value of Trust Funds (in NIS billions)

תרשים 7: שווי נכסים מנוהל בחברות לניהול Chart 7: Total value of assets under תיקים (במילארדי שח') management by portfolio management companies in 2006-2011(in NIS billions) תרשים 8: מס' נבחנים בבחינות הרישוי Chart 8: No. of Licensing examinees תרשים 9: טיפול בבקשות פטור Chart 9: Processing of exemption applications

תרשים 10: טיפול בבקשות להתמחות בשנים Chart 10: Processing of internship applications, 2006-2011 2011-2006 טיפול בבקשות להתמחות No. of applications processed

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Appendixes

Appendix No. 1 2011 Budget Implementation Report (in NIS thousands)

Section Section title Approved Updated 2011 budget no. budget for budget for implementation 2011 2011 GENERAL: Total expenditure 156,200 156,200 145,605

SALARIES: Total 79,360 81,810 80,355 [ 203 ] [ 203 ] [ 203 ] 1001 Salaries of ISA employees 60,830 63,493 63,492 Provision for pensions & 1002 compensation 9,600 9,259 8,958 1003 Overtime 5,950 5,950 4,975 1004 Temporary employees 390 421 420 [ 24 ] [ 24 ] [ 24 ] 1005 Interns & students 1,710 1,710 1,540 1006 Chairman's salary 710 790 783 1008 Expenses of ISA employees 170 187 186

RELATED EXPENSES: Total 8,550 8,550 7,273 Training & continuing 2001 education program 950 950 876 2002 Vehicle maintenance 1,900 1,969 1,968 2003 Car rentals 100 100 28 Traveling & living expenses in 2004 Israel, moving expenses 5,100 5,441 4,583 2005 Loan fund* 500 90 (181)

MAINTENANCE: Total 17,820 19,539 19,449 3001 Organizational expenses 990 1,250 1,235 3002 Office supplies 700 812 811 Building maintenance & 3003 repairs 14,900 16,165 16,164 3004 Post & telephone 980 1,062 1,061 Equipment, machinery & 3005 furniture 250 250 178

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PROFESSIONAL ACTIVITY: Total 12,310 11,551 10,250 Licensing of investment advisors & portfolio 4002 managers 1,800 1,800 1,736 4004 Legal expenses 450 652 651 4005 Professional library 550 550 442 Participation in int’l 4006 conferences 350 350 247 4007 IFRS (participation) 1,200 1,250 1,249 Auditing of corporations, 4008 mutual funds & advisors 4,850 3,661 3,124 4010 Investor education 150 150 4 4011 Counseling services to the ISA 1,000 883 629 4012 Seminars 250 310 269 Section Section Approved Updated 2011 budget no. budget for budget for implementation 2011 2011 4015 Academic research fund 370 391 390 4016 Foreign relations 590 756 755 4017 Internal auditing 200 248 247 Preparation of financial 4018 statements 550 550 508

INFORMATION SYSTEMS: Total 12,800 11,840 10,475 5003 Computer maintenance 11,250 10,290 9,279 Purchase of computerized 5004 information 1,550 1,550 1,196

DEVELOPMENT BUDGET: Total 20,800 20,800 17,803 Information systems 6001 (hardware & software) 17,000 17,000 16,615 6002 Purchase of vehicles** - (613) 6003 Buildings renovation 3,800 3,800 1,800

RESERVES: Total 4,560 2,110 - 7005 Salary reserves 2,600 150 - 7006 Inflation reserves 830 830 - 7010 General reserves 1,130 1,130 -

INCOME: Total (estimate)* (133,000) (133,000) (131,796) 9001 Prospectus fees (47,000) (47,000) (46,291) 9002 Annual fees (60,000) (60,000) (63,139)

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9003 Net financing income (15,000) (15,000) (11,856) Investment advisors licensing 9004 fees (11,000) (11,000) (10,510)

* Part of the deposit was withdrawn. ** An amount received from the Vehicle Administration Unit for the sale of thirteen vehicles.

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Appendix No. 2

Approved Budget for 2012 (in NIS thousands) Section Section Approved budget no. for 2012 GENERAL: Total expenditure 175,920 SALARIES: Total 90,490 [ 216 ] 1001 Salaries of ISA employees 70,180 Provision for pensions & 1002 compensation 10,310 1003 Overtime 6,330 1004 Temporary employees 500 [ 30 ] 1005 Interns & students 2,140 1006 Chairman's salary 810 1008 Expenses of ISA employees 220

RELATED EXPENSES: Total 8,790 Training & continuing education 2001 program 1,010 2002 Vehicle maintenance 2,000 2003 Car rentals 100 Traveling & living expenses in Israel, 2004 moving expenses 5,580 2005 Loan fund 100

MAINTENANCE: Total 20,700 3001 Organizational expenses 1,200 3002 Office supplies 700 3003 Building maintenance & repairs 17,500 3004 Post & telephone 1,050 3005 Equipment, machinery & furniture 250

PROFESSIONAL ACTIVITY: Total 13,480 Licensing of investment advisors & 4002 portfolio managers 3,200 4004 Legal expenses 600 4005 Professional library 550 4006 Participation in int’l conferences 300 4007 IFRS (participation) 1,200 4008 Auditing of corporations, mutual 4,100

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funds & advisors 4010 Investor education 150 4011 Counseling services to the ISA 950 4012 Seminars 400 4015 Academic research fund 700 4016 Foreign relations 550 4017 Internal auditing 230

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Section Section 2012 Proposed no. Budget 4018 Preparation of financial statements 550

INFORMATION SYSTEMS: Total 13,000 5003 Computer maintenance 11,250 Purchase of computerized 5004 information 1,750

DEVELOPMENT BUDGET: Total 22,500 Information systems (hardware & 6001 software) 17,000 6003 Buildings renovation 5,500

RESERVES: Total 6,960 7005 Salary reserves 5,000 7006 Inflation reserves 830 7010 General reserves 1,130

INCOME: Total (estimate)* (137,000) 9001 Prospectus fees (49,000) 9002 Annual fees (67,000) 9003 Net financing income (13,000) 9004 Investment advisors licensing fees (8,000)

* In accordance with the decision of the ISA Finance Committee and an agreement reached with the Budget Department of the Ministry of Finance, the ISA is to reduce the annual fees payable by corporations and individual supervised by the ISA by up to 40 percent per year for a number of years. The length of the reduction period (between two and four) and its extent shall be discussed by the Knesset Finance Department in the near future.

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