Allens Arthur Robinson

United Kingdom

New mechanism for disseminating regulatory information proposed - FSA consults

The Financial Services Authority of UK (FSA) is proposing the establishment of a new mechanism for the distribution of regulatory information.

Under the current model, listed companies are required to submit announcements made in accordance with the Listing Rules to the Company Announcements Office of the London Stock Exchange, which information is subsequently disseminated to the market via the Regulatory News Service (RNS). As a result of the transfer of the functions of competent listing authority to the FSA, this method of broadcasting information is no longer considered to be appropriate. 

A new procedure is proposed - instead of making their announcements through RNS, the FSA will approve services that meet its standards as primary information providers (PIPs). Listed companies will have a choice of PIPs to which they can release such information. The information will then be released from the PIPs to secondary information providers ie, services such as Dow Jones and Reuters.

The FSA proposal paper sets out for discussion the overall structure for the dissemination, the standards that must be met by PIPs and the method for ensuring that price sensitive information is disseminated quickly, in a cost effective manner and is widely distributed.

(Source: FSA Press Release, PN051/2001, 2/05/01.)

N2 - FSA proposes changes to Listing Rules

The FSA has released a Consultation Paper for public comment which sets out how the FSA proposes to use its listing powers under the Financial Services and Markets Act 2000 (UK). These powers are not yet in effect - they will come into effect on a date to be nominated (called N2) by the Treasury.

Whilst the proposed changes replicates many of the existing Listing Rules, there are also new provisions dealing with the following:

• how the disciplinary powers of the FSA will be exercised against directors, former directors and sponsors for breaches of the Listing Rules (including the new powers to fine listed companies and its directors);
• the requirement for a listed company to notify the FSA when it has become aware of a breach by a director of the company's own code of dealing and may include a notification to the market if so requested by the FSA (Eds: under the Listing Rules, a listed company is required to implement a code of dealing in terms no less exacting than the Model Code); and
• an update on the Guidance on the dissemination of price sensitive information taking into account advances in technology (the Guidance suggest best practice for meeting continuing disclosure obligations imposed under the Listing Rules).

(Source: FSA Press Release, PN/084/2001, 28/06/01.)

European and US securities traded on LSE

The London Stock Exchange (LSE) recently launched the International Retail Service to give investors an opportunity to trade in stocks of blue chip companies from Europe and the US.

Initially 110 stocks from 10 different countries were available for trading. This has now been expanded by the addition of a further 45 stocks that include Dow Jones 30 stocks. Under this arrangement, investors can use their existing brokers to trade in international securities with the stocks being priced in sterling. According to the LSE, it intends to extend the service to cover Europe's 300 biggest shares, the top 100 shares in the US, Asian securities, warrants and ADRs.

(Source: Press Release LSE, 11/06/01. For more, see the press release)

Hong Kong

Internet offering of collective investment schemes - a view from Hong Kong

The Securities and Futures Commission of Hong Kong (SFC) recently released its CIS Internet Guidance Note clarifying the requirements to be met by persons offering collective investment schemes on the Internet.

The guidelines provide, inter alia, that:

• prior approval must be obtained from the SFC for any collective investment schemes (CIS) that target the Hong Kong public;
• where hyperlinks are provided the links must not lead to web-sites containing CIS that have not been authorised;
• the information contained on the web-sites should be updated and current;
• where the CIS is offered online, a full version electronic prospectus must be provided and it must be reasonably easy to access; and
• the prospectus must be available prior to gaining access to an application form or the webpages for the execution of an order to purchase an interest in the CIS.

SFC consults on index funds

Following the increasing interest in index funds, the SFC has released for consultation its proposed code regulating index funds that will form part of the Code on Unit Trusts and Mutual Funds.

The SFC notes that there are as yet no special rules regulating index funds in any comparable overseas jurisdictions. This stems from the fact that fund providers use different methodology and rules for the composition and maintenance of indices. Some of the rules proposed include requirements that:

• to obtain approval from the SFC, such funds must comply with the following criteria:

• it must have clearly defined objectives;
• the market or sector it aims to represent should be clear;
• the index should be broadly based with a weighting cap of not more than 40% for a single constituent security or not more than 75% for its top 5 constituent securities. Exceptions to this requirement may be made on a case by case basis;
• the index should be easily tradeable and its rules should be consistent and transparent;

• the index disclose significant matters to the SFC such as any change in the:

• methodology for compiling or calculating the index,
• composition of the index;
• weighting of index constituents;

• the offering document should contain certain disclosures such as the description of the market or sector the index aims to represent, the latest weighting of the index's top 10 constituent securities, description of the rules of the fund and any other information relevant and material for investors to make informed decisions.

(Source: SFC Press Releases, 20/07/01.)

Hong Kong

Changes to IPO Rules for GEM 

The SFC and the Stock Exchange of Hong Kong Limited have approved the proposed amendments to the Listing Rules of the Growth Enterprise Market (GEM). The amendments were prompted by a review undertaken of the Rules governing the listing of securities on the GEM board.  

Some of the changes to the Rules include:

• a reduction in minimum period from 24 months to 12 months for an applicant for admission to the GEM to demonstrate that it has actively pursued 1 focused line of business for applicants that satisfy the following criteria:

• have a total revenue of HK$500 million in the last 12 months period, total assets of at least HK$500 million or market capitalisation of at least HK$500 million at the time of listing;
• at the time of listing has a minimum market capitalisation of at least HK$150 million in public hands held by at least 300 public shareholders with the largest 5 and 25 of these shareholders holding in aggregate no more than 35% and 50% respectively of these securities;
• must have pursued that focused line of business for at least 12 months; and
• IPO price of at least HK$1.

• the company may not issue new securities within the first 6 months of listing except to acquire assets which complement its focused line of business and meet the following criteria:

• the acquisition must not be greater than 50% of the profit or net assets of the company;
• there must not be a change in the control of the company after the issue of the securities for the acquisition;
• shareholders' approval must be sought and interested persons must abstain from voting;
• any person subscribing for the securities will be subject to a lock-up arrangement similar to that applicable to an initial management shareholder or significant shareholder; and
• an advice with information about the transaction must be provided from an independent financial adviser.

• moratorium period on the disposal of securities by initial management shareholders will be for a period of 12 months and 6 months for those initial management shareholder with no more than 1% shareholding in the company;
• initial management shareholders now include senior management, all directors of the company and investors with board representation; and
• the prescribed minimum percentage of securities in public hands will be 25% and 20% for companies with market capitalisation not exceeding HK$4 billion and over HK$4 billion respectively. Also at the time of listing the minimum market capitalisation in public hands must be higher of HK$30 million and 25% for companies with market capitalisation not exceeding HK$4 billion and the higher of HK$1 billion and 20% for companies with market capitalisation over HK$4 billion.

(Source: HKEx Press Release, 27/07/01. For more, see the press release and addendum to press release)

United States

Earnings management, auditors independence and Regulation FD

In a recent speech to the DC Bar Corporation, Finance and Securities Section, Mr Isaac Hunt, a Commissioner of the US Securities & Exchange Commission (SEC) highlighted some contemporary market conduct and practices that have attracted the attention of the SEC.

According to Mr Hunt, there has been an increasing trend of companies massaging financial information in order to meet past or projected earnings levels. They include:

• earnings management - the manipulation of earnings to prop up a company's profits;
• increase use of pro forma information - these are unaudited financial statements that exclude costs or expenses in a format that suggests reliability and soundness; and
• channel stuffing - companies "dipping" into next quarter's sales to meet current quarterly targets often by offering deep discounts in order to motivate their customers to buy sooner rather than later.

Mr Hunt also touched on the recent changes to enhance auditor independence and on the rationale for the introduction of Regulation FD. (Eds: For a summary of Regulation FD which deals with selective disclosure of information, please read ITM 2 or see a copy of the Regulation FD) He indicated his concern that Regulation FD may have a chilling effect on the disclosure of negative material information by delaying the dissemination of such information.

(Source: SEC Speeches, "Emerging Issues Under the Federal Securities Laws". For more, see a copy of the speech)

Malaysia

More flexibility for the offer, issue and listing of securities in Malaysia

As part of the ongoing liberalisation of the capital markets in Malaysia towards a disclosure based regime for securities regulation, the Securities Commission of Malaysia (SC) has introduced certain changes to fund-raising requirements in Malaysia.

These are:

• companies seeking listing on the Kuala Lumpur Stock Exchange (KLSE) may meet the historical profit performance requirements on the basis of a 4 year track record in addition to the other requirements that have to be met. This change will also apply to reverse take-overs and back-door listings;
• companies may issue and list irredeemable convertible unsecured loan stock as part of their float on the KLSE;
• the abolition on the number of shares that may be preferentially allocated by a company seeking listing on the KLSE to its directors, employees and other business entities that have contributed to the success of the company. The total preferential allocation should not exceed 5% of the issued and paid-up capital of the company;
• listed companies may now undertake bonus issues of securities through capitalisation of share premium without the need to meet stringent financial requirements provided that the availability of the premium is confirmed by external auditors of the company; and
• companies are now free to allocate as many shares to its directors and employees under an employee share option scheme provided that the total number of shares offered under the scheme does not exceed 10% of the issued capital of the company, the shares allocated to directors and senior management should not exceed 50% of shares available under the scheme and the life of the scheme is now extended to 10 years amongst others.

(Source: SC, Press Release 10/05/01.

2% to 5% - substantial shareholding definition changes yet again!

Recently, the Securities Industry (Reporting  of Substantial Shareholding) Regulations 1998 was amended to define a substantial shareholder as a person having an interest in not less than 5% of the nominal amount of the voting shares of a company. 

Prior to the amendment the threshold for reporting of substantial shareholding was 2% (having been reduced from the figure of 5%). In addition, bare trustees are no longer required to disclose substantial shareholdings. The changes were effected in order to ensure consistency with the amendments made to the Companies Act 1965 and took effect on 1 August 2001.

(Source: SC, Press Release 6/08/01.

Singapore

Hedge Fund Guidelines released

New guidelines concerning the sale of hedge funds to the public were released by the Monetary Authority of Singapore (MAS). The key requirements for public offers of hedge funds include:

• the requirement that the minimum initial subscription per investor be $100,000;
• prominent disclosure in the prospectus of the higher than average risks of investing in such funds and that investors may lose all or a large part of their investments;
• managers and advisers of hedge funds must have at least 5 years business experience and possess training in the field of the contemplated investment by the fund; and
• all marketing materials should state the inherent risks of investing in a hedge fund.

(Source: MAS Press Release, 15/06/01. For more, see the release)

European Union

Alternative Trading Systems - FESCO wants your views

In response to the proliferating number of Alternative Trading Systems (ATS) that have mushroomed recently, the Forum of European Securities Commissions (FESCO) has released a consultation paper on the regulation of ATS with a view to identifying the appropriate standards/ regulation of such activity.

The ultimate aim is to ensure that users of ATS and the integrity of the overall capital markets are protected. FESCO has flagged the following issues as those it considers important in arriving at the appropriate standards and regulations:

• who is to be the subject of the regulation? Should the definition of the operator of an ATS be drafted widely or narrowly?;
• the need for registration or authorisation from the relevant authorities for entities running an ATS and the type of information to be provided to both the regulator and users and standards that must be met;
• the need to adopt trading arrangements that result in fair and orderly trading;
• market supervision and monitoring of trading on the ATS to detect and deter market abuse; and
• the need to clarify the obligations and responsibilities of the operator in the settlement of transactions.

All comments should reach FESCO by 31 August 2001.

(Source: FESCO Press Release, 11/06/01.)

Naked Short, Greenshoe and Safe Harbour - not the look for summer

Fresh from its earlier consultation on price stabilisation and allotment of shares, FESCO has issued another consultation paper as a result of the comments received from the earlier consultation.

In relation to stabilisation (which is applicable to both equity and debt issues), FESCO is proposing the adoption of the following standards:

• that stabilisation be undertaken in the context of an initial or secondary offering to support the price of either equity or debt securities in the secondary market for a limited period of time beginning with the commencement of trading of the securities and this period must be disclosed to the market in advance;
• in the case of equity securities, stabilisation should only be undertaken to support current trading price of the securities and should not be executed above the offering price. As for debt securities, it can only be undertaken for the purposes of price support;
• responsibility for stabilisation must be borne by 1 entity within the consortium offering the securities;
• there should be prior disclosure in the prospectus of the possibility of stabilisation and the prospectus must include such information as:

• the period stabilisation may occur;
• the identity of the entity managing the price stabilisation; and
• any other information that may be material for an investor's decision to subscribe for such securities.

• the use of greenshoe as a hedge for any overallotment facility that may be entered into between the issuer and the other entities involved in the offering and the disclosure of such facilities in the prospectus;

Entities meeting these standards will be entitled to a safe harbour when conducting price stabilisation activities. In the case of allotment, FESCO proposes:

• that investors be treated fairly within the same category, class or tranche of offers;
• prior disclosure to investors of the methods used within each category, class or tranche of offers;
• disclosure to investors of the final size of the offer and the result of the allotment including the allocation between the various tranches; and
• that there be no preferential treatment for employees, managers and directors of entities playing a role in the offering.

The consultation period closes on 3 September 2001.

(Source: FESCO Press Release, 11/06/01.)

International

IOSCO re-examines securities activity on the Internet

In a follow-up to its inaugural report in 1998 on the use of the Internet by investors, the securities industry and regulators, the International Organisation of Securities Commissions (IOSCO) has taken another look at the current industry and regulatory practices and approaches.

In its Report, IOSCO has also reviewed the implementation of the recommendations made in its 1998 Report and recommends that:

• in determining the scope of liability for maintaining a website during registered offerings and for hyperlinks to third party information, regulators consider imposing liability on the basis of whether the issuer or intermediary has prepared, endorsed or adopted the hyperlinked information;
• regulators permit issuers and intermediaries to maintain communications with the public during the public offering process insofar as the communications comply with the rules relating to public offerings;
• regulators require day trading providers to inform their prospective customers of the risks and costs involved in securities trading, and the suitability of using online trading for their investing in securities;
• in relation to internet discussion sites, that there be mandatory disclosure to be made by the person posting messages and mandatory disclosure to persons viewing the postings. In addition, the operators of such sites should be required to monitor for misleading or deceptive postings and to withdraw the right of access to persons making misleading or deceptive postings; and
• regulators consider mandating that internet service providers maintain subscriber and traffic data to ensure effective enforcement of securities regulation.

(Source: IOSCO Press Release, 27/06/01. For more, see the press release)

Follow up on securitisation

Securitisation by other names - report from Spain

Mark Wormell, one of AAR's securitisation partners, recently attended the Global Asset Securitisation Conference in Spain. While Mark could not be drawn on the sun and sights in Spain he had the following to report on two interesting developments in the securitisation market. (Eds: Mark's feature article on securitisation can be found in ITM 4).

Synthetic securitisation

The synthetic securitisation market is experiencing massive growth at the moment and is claimed to be 50% bigger than the cash securitisation market. The big issue in synthetic securitisation is the definition of credit event under the ISDA, and whether reconstruction should be a credit event. The focus of most financial institutions is moving from buying and holding assets to originating, funding them through warehouse facilities and then selling.

Whole of business securitisation

Another popular area at the moment is that of "whole of business securitisation". A case study of the Andrew Lloyd Webber Theatre transaction and Rank Hovis McDougall finance transaction was presented to participants. (Eds: AAR acted on the Australian leg of the Rank Hovis McDougall finance transaction). Whole of business securitisation is the securitisation of a company or group of companies that takes the form of an issue of securities backed by a fixed and floating charge over the "whole of business". In all material respects, this is what Australian lawyers have been doing with project financing, infrastructure financing and many corporate financings for the last 30 years. Whole of business securitisation would work in Australia and AAR would be happy to advise and act on any such transactions.