Amendments to the Prospectus Directive your questions answered

Transcription

1 June 2012 Amendments to the Prospectus Directive your questions answered Overview Directive 2010/73/EU, which amends the Prospectus Directive 2003/71/EC and the Transparency Directive 2004/109/EC (the PD Amending Directive ), came into force on 31 December The PD Amending Directive must be implemented by Member States into national law by 1 July The changes set out in the PD Amending Directive and other legislation stemming from the PD Amending Directive will be significant for all issuers with securities admitted to trading on an EEA regulated market. Issuers of retail debt and equity securities will be more significantly affected. The changes will be less significant for issuers of public syndicated debt as opposed to those who issue complex structured debt. This note, which (amongst other things) contains a set of frequently asked questions on the new requirements, is split into six parts: Contents Overview... 1 Part 1 The Legislation... 2 Part 2 Final Terms... 6 Part 3 Prospectus Summaries Part 4 Retail Cascades 13 Part 5 Certain other amendments to the PD Regulation Part 6 Timing and what to do next Useful Background Reading > Part 1 sets out the legislative framework which implements the PD Amending Directive in the United Kingdom; > Part 2 covers the changes which affect issues under a programme base prospectus using final terms; > Part 3 deals with the new content and format requirements for prospectus summaries; > Part 4 deals with the new requirement that an issuer consents in writing to the use of its prospectus by a third party in a retail cascade; > Part 5 covers the latest position relating to information on taxes withheld at source, indices composed by an issuer and related parties and profit forecasts and estimates; and > Part 6 deals with the timing of the new rules and next steps. Frequently asked questions on the Prospectus Amending Directive 1

2 Part 1 The Legislation On 20 January 2011, the European Commission mandated the European Securities and Markets Authority ( ESMA ) to provide technical advice on possible delegated acts concerning the Prospectus Directive as amended by the PD Amending Directive. ESMA submitted its Technical Advice on Part I of the mandate (the Part I Technical Advice ) to the European Commission on 4 October The Technical Advice on Part II of the mandate (the Part II Technical Advice ) was submitted to the European Commission on 29 February On 30 March 2012, the European Commission published the first draft regulation (the Part I Regulation ). The Part I Regulation will amend the Prospectus Directive Regulation (EC) No 809/2004 (the PD Regulation ) in relation to (amongst other things) the format and content of: (i) (ii) final terms to a base prospectus; and prospectus summaries (required to be included in retail debt and equity prospectuses). The Part I Regulation reflects most of ESMA s advice set out in its Part I Technical Advice. The second draft regulation (the Part II Regulation ) was published on 4 June 2012 and will amend the PD Regulation in relation to (amongst other things): (i) (ii) the consent to use a prospectus in a retail cascade; and certain other provisions of the PD Regulation relating to indices composed by an issuer and related parties and profit forecasts and estimates. The Part II Regulation reflects most of ESMA s advice set out in its Part II Technical Advice. The European Parliament and the European Council have until 30 June 2012 to object to either of these regulations. As objections are unlikely, we expect that both the Part I Regulation and the Part II Regulation will come into effect on 1 July They will not require implementation into national legislation and will take effect directly in each Member State. The European Commission has also appointed ESMA to provide technical advice on Part III of the mandate in relation to: (i) (ii) (iii) the criteria to be applied in assessing the equivalence of a third country financial market; the preparation of a comparative table recording the liability regimes applies by each member state in relation to the prospectus directive; and the prospectus disclosure requirements for convertible bonds. Frequently asked questions on the Prospectus Amending Directive 2

3 The European Commission has agreed with ESMA that the technical advice on Part III of the mandate may be considered at a later stage so that ESMA may focus on the Part I and Part II mandates. UK implementation of the PD Amending Directive July 2011 Implementation On 31 July 2011, the United Kingdom implemented two measures of the PD Amending Directive ahead of the 1 July 2012 deadline. This occurred following a consultation process which received universal support from market participants. The relevant provisions amended Articles 1(2)(h) and 3(2)(b) of the Prospectus Directive and increased: > the total size of an offer that may be made to investors before the offer falls within the scope of the prospectus directive regime - from 2.5 million to 5 million; and > the threshold for the number of investors to whom an offer may be made before a prospectus is required - from 100 to 150 investors per member state. The changes were made by amending the Financial Services and Markets Act 2000 ( FSMA ). The Financial Services Authority s (the FSA ) Prospectus Rules were subsequently updated to reflect the increased threshold amounts. July 2012 Implementation On 13 December 2011, HM Treasury and the FSA published a joint consultation paper on the implementation of the remaining amendments of the PD Amending Directive. Broadly, the changes relate to: > increasing the exemption threshold for debt securities issued in a continuous or repeated manner by credit institutions over a 12 month period from 50 million to 75 million; > setting higher thresholds before an exemption from the prospectus regime is available i.e. increasing the minimum consideration a single investor must provide and the minimum denomination per unit, in each case, from 50,000 to 100,000 for an offer of securities; > introducing (i) a common format of prospectus summaries to facilitate comparability of the prospectus summaries of similar securities and (ii) the concept of key information whereby investors must be given essential and appropriately structured information in prospectus summaries for them to understand the nature of the risks posed by the issuer, and clarifying the liability position attached to prospectus summaries for issuers; > the exemption from the obligation to publish a separate prospectus in the context of an offer by way of retail cascade (where certain conditions are satisfied); Frequently asked questions on the Prospectus Amending Directive 3

4 > changing the commencement date of the 12 month validity period of a prospectus from when the prospectus is published to the date when it is approved; > changing the method of publication of a prospectus i.e. (i) issuers now have the option to publish their prospectuses in electronic form on either the issuer s own website or on the website of the financial intermediary placing or selling the transferable securities (as opposed to on both websites) and (ii) issuers must now also publish a prospectus electronically where the printed/newspaper form publication method has been used; > clarifying the time period for when a supplement is required i.e. between the time the prospectus is approved and the final closing date of the offer or the time when trading on a regulated market begins, whichever is the later; > in the context of an investor s right to withdraw acceptance of an offer upon the publication of supplement, clarifying that such right (i) is to end when the offer closes and the securities are delivered (if a supplement is required after this time (e.g. because admission of the securities to trading will take place at a later date) the right to withdraw will not arise), and (ii) must be exercised, at the latest, by the end of the second working day after the date on which the right arises (the final date on which investors have the right to withdraw from an offer must now be included in the supplement); and > better alignment with other EU legislation (e.g. MiFID) where disclosure requirements overlap. The consultation closed on 13 March HM Treasury has indicated that wherever possible and where consistent with FSMA, EU legislation will be subject to direct copy out into UK law. The FSA will also apply this principle with respect to amendments to be made to its Prospectus Rules, Disclosure Rules and Transparency Rules and Listing Rules, where applicable. On 25 May 2012, HM Treasury and the FSA published a joint policy statement to report on the consultation process. The policy statement sets out the responses received and the policy decisions made in relation to the consultation paper. An updated draft statutory instrument (amending FSMA) together with the FSA s near final rules are attached to the policy statement. The key changes to the updated draft statutory instrument (from that set out in the consultation paper) are: (i) (ii) clarification that the consent of either the issuer, or other person responsible for drawing up a prospectus (but not both), is required on a retail cascade; an amendment to the definition of Qualified Investor the definition now ties in fully with MiFID as required by the prospectus directive (including taking account of any changes to the investor s MiFID client categorisation); and Frequently asked questions on the Prospectus Amending Directive 4

5 (iii) clarifications of the content of the prospectus summary, and the definition of key information. The Legislation Tree set out in the Schedule is a helpful summary of how the various aspects of the PD Amending Directive will be implemented in the United Kingdom. See also Useful Background Reading below for further details. Frequently asked questions on the Prospectus Amending Directive 5

6 Part 2 Final Terms What is the restrictive approach regarding final terms? First of all, the base prospectus must contain all information (which is required by the Prospectus Directive to be disclosed) that is knowable at the time that the base prospectus is approved. This means all information required to be disclosed that the issuer could have included in the base prospectus at the time it was drawn up. As a result, if market conditions at the time of an issue demand that the issuer includes a new term (or amends an existing term), this cannot be achieved by including that term in the final terms for that issue. The Part I Regulation has categorised the disclosure requirements in the PD Regulation as Category A, B or C information: > Category A information may not be contained, amended or supplemented in the final terms; any change would require a supplement or a new base prospectus. > Only specific details relating to Category B information, which are unknown at the date of approval of the base prospectus, may be included in the final terms the general principles relating to Category B information must be included in the base. (For example, where the base prospectus provides for redemption at the option of the issuer, the final terms may specify the optional redemption date/amount.). > Category C information may be included in the final terms. Final terms cannot be used to amend or replace any information in the base prospectus. This is the case even if the amendments are not prejudicial (or are, in fact, beneficial) to the interests of the holders or are actually requested by investors. What kind of information falls under the different categories? Examples of Category A information include: > risk factors; > responsibility statements; > governing law; > form of the securities and their ranking; and > credit ratings assigned to the issuer. Examples of Category B information include: > description of the securities and the rights relating to the securities; > provisions relating to interest and methods of calculating interest; > pay-out formulae; > details of representatives of bondholders; and Frequently asked questions on the Prospectus Amending Directive 6

7 > method of determining pricing. Examples of Category C information include: > reasons for the offer; > total expenses/estimated net proceeds; > ISIN details; > currency of the issue; > maturity date; > information on due dates for interest/indication of yield; > details of underwriters, paying agents, and intermediaries; and > credit ratings assigned to the securities. May only securities note information be included in final terms? Some additional information (i.e. information which is not specifically required by the securities note annexes) may be included in the final terms. However, only additional information which is included in an exhaustive list in the Part I Regulation may be so included. Where can the list of acceptable additional information be found? The list of additional information that is acceptable for inclusion in final terms is contained in Annex XXI of the PD Regulation (as amended by the Part I Regulation). The list of additional information allows for: > example(s) of complex derivatives securities as referred to in recital 18 of the PD Regulation; > additional provisions, not required by the relevant securities note, relating to the underlying; > country(ies) where the offer(s) to the public takes place; > country(ies) where admission to trading on the regulated market(s) is being sought; > country(ies) into which the relevant base prospectus has been notified; > Series Number; and > Tranche Number This does not cover certain information commonly contained in final terms (for example names of any stabilising managers). May the base prospectus contain options with respect to Category A and B information? Yes new Article 22(1a) to the PD Regulation contemplates that a base prospectus may contain options with regard to any category of information or any additional information. The final terms should then determine which of this optional information is applicable to the relevant issue by referring to the Frequently asked questions on the Prospectus Amending Directive 7

8 relevant sections of the base prospectus or by replicating such information in the relevant final terms i.e. menu-picking. For example, the base prospectus may state that securities to be issued under the programme may be in registered or bearer form (this is Category A information). The final terms may then specify whether the securities being issued are in registered or in bearer form. What changes should be made to programme terms and conditions to comply with ESMA s restrictive approach to final terms? This depends on how the existing programme terms and conditions are drafted and how the issuer wants to use its programme. Due to the restrictive approach to final terms, issuers may wish to review their terms and conditions to ensure that they contain a broad range of optional clauses and sufficient flexibility within each clause to ensure that trades can be executed quickly and without the need to amend or supplement the base prospectus. Certain provisions, not typically included in the terms and conditions in the base prospectus but which may be required for any particular issue or which may, going forward, need to be expanded in the terms and conditions in the base prospectus, include: > noteholders change of control put option; > issuer s early redemption provisions (such as spens or equivalent for non-sterling issues); > coupon step up/step down provisions; > noteholders restructuring event put option; > provisions relating to index-linking; > additional interest reference rate provisions for floating rate notes; > standardising day count fractions (i.e. include all possible options); and > additional flexibility for notice periods. Issuers may wish to consider including some or all of these and other provisions, into their base terms and conditions going forward. Otherwise, if at the time of any issue, the underwriting banks require one of these terms to be included for successful marketing, the issuer may need either to supplement (if permitted by the relevant competent authority to issue a supplement for this purpose) or update its base prospectus, or produce a drawdown prospectus. This will have timing and cost implications. Does this mean that final terms will now be reviewed by the competent authorities? There is nothing in the Part 1 Technical Advice or the Part 1 Regulation to suggest that this is going to be the case. However, the Part 1 Technical Advice and the Part 1 Regulation do not specify how compliance with the new Frequently asked questions on the Prospectus Amending Directive 8

9 restrictive approach to final terms is supposed to be policed. We expect there may be some procedures put in place by competent authorities to check final terms, perhaps on a random sample basis, but there has been no announcement to this effect. What is the disadvantage of having to issue a supplement (or amend the base prospectus) if changes to the terms and conditions are required? An issuer may use a supplement to amend or replace information in the base prospectus where the information is significant (within the meaning of Article 16 of the Prospectus Directive). The supplement must, however, be approved by the relevant competent authority and this will affect the timing of the issuer s access to the market. (Even though supplements may be approved on an expedited basis, a competent authority is allowed a maximum of seven working days under the Prospectus Directive to approve a supplement). In addition, certain competent authorities will not permit a supplement to be used as a means of introducing new securities note information or a new product (for example an index-linked security) where the base prospectus did not already contain sufficient details relating to such product. In these cases, the base prospectus itself would need to be amended (which is more costly and time consuming) or a standalone drawdown prospectus would need to be produced. Whilst a competent authority may in practice approve a drawdown prospectus more quickly, it is allowed a maximum of 10 working days under the Prospectus Directive to do so. What is the issue-specific summary? For a retail programme, the base prospectus must include a summary. In addition, the Part I Technical Advice and the Part 1 Regulation require that an issue-specific summary be prepared and attached to the final terms for each relevant retail issue. This is an updated version of the base prospectus summary, including any outstanding key information which was not known at the time of the approval, such as the issue price and coupon, and excluding any information that is not applicable to the relevant issue. The issue-specific summary does not need to be approved by the relevant competent authority, merely filed with it as an attachment to the final terms. Does the issue-specific summary need to be translated? If the base prospectus summary is required to be translated into other languages, the issue-specific summary must also be translated into the same languages. For example, if a retail base prospectus is passported into Spain, the prospectus summary will need to be translated into Spanish for any nonexempt offer in Spain. In such a case, the issue-specific summary will also need to be translated into Spanish. Will the format of final terms change? The Part 1 Technical Advice recommended that final terms should exclude any information which is not applicable to the relevant issue. Much concern was expressed in the market that this prohibited marking certain items Not Frequently asked questions on the Prospectus Amending Directive 9

10 Applicable in final terms. This practice allows for identical numbering of the line items between different issues, which is helpful for all market participants, including agents and clearing systems. Thankfully, the Part I Regulation reversed ESMA s position in the Part I Technical Advice and provides that where an item is not applicable, it shall appear in the final terms marked as such. ICMA is currently looking at revisions to the current forms of ICMA final terms in light of the Part I Regulation. Is there any exemption for wholesale programmes? Wholesale programmes will need to comply with the restrictive approach to final terms described above where the securities being issued are to be admitted to a regulated market in an EEA member state. However, given that a prospectus summary is not required for a wholesale prospectus, no issuespecific summary will be required for a wholesale issue. Frequently asked questions on the Prospectus Amending Directive 10

11 Part 3 Prospectus Summaries Will there be any changes to the format of the prospectus summary? Yes. Under the new rules a prospectus summary is required to be made up of five main sections (the Sections ). These are: A: Introduction and warnings B: Issuer (and any guarantor) C: Securities D: Risks E: Offer The Sections must appear in the summary in the order set out above (i.e. the Section regarding the offer must come after the Section on risks). A list of required information (the Elements ) to be included in each Section is specified by reference to the disclosure requirements in the relevant PD Regulation annexes. What is key information in the context of a prospectus summary? An issuer is required, under the PD Amending Directive, to ensure that the summary conveys the key information regarding the securities, the issuer and the guarantor (if any) in order to aid investors when considering whether to invest in the securities. ESMA has determined that the Elements are the key information disclosure requirements for the purposes of a summary. If an issuer thinks that a particular piece of information (which is not required to be disclosed by the Elements) should be included in the summary to fulfil this requirement, it may include such information. However, no additional section may be added. The additional information can be included in the summary, but it will have to be put into one of the five Sections. The Part I Regulation diverges from the approach taken by ESMA in the Part I Technical Advice insofar as it states that the order of the Elements within each of Sections A to E is mandatory and each Element must either be populated with the relevant information or be referred to as being not applicable. This will take up valuable space when preparing prospectus summaries, particularly for multi-product programmes. How should risk factors be presented in the prospectus summary? ESMA s view is that the summary must contain the key information on the key risks. To that end, an issuer may simply include the headings of the risks set out in the base prospectus if so doing achieves the objective of giving the key information on key risks. ESMA has also specified that reproducing long extracts from the risk factors section of the prospectus in the summary is inappropriate. There is nothing in the Part I Regulation to suggest that this approach should not be followed. Frequently asked questions on the Prospectus Amending Directive 11

12 Is there a word limit on the summary going forward? ESMA s position in the Part I Technical Advice is that a summary should not exceed 7% of the length of a prospectus or 15 pages, whichever is the shorter. Helpfully, the Part I Regulation does not follow the Part I Technical Advice in this regard and refers to 7% of the length of a prospectus or 15 pages, whichever is the longer. This is a positive development for issuers that already struggle with the word limit on prospectus summaries (especially given the new requirement to include a reference to non-applicable Elements). It is assumed that ESMA s advice on how to calculate the length of the summary still applies (i.e. that the calculation of the percentage should be performed by excluding financial information from the denominator, and that the summary should be in normal formatting i.e. not small print.) Can cross references to the main body of the prospectus be included in the summary? No. The summary may not contain any cross references to other parts of the prospectus. It is required to be self-contained. ESMA s advice recognises that it is helpful to draw the attention of the reader to parts of the prospectus, but its view is that this is best achieved with a clear table of contents. For a multi-issuer/guarantor programme, is a separate summary required for each issuer/guarantor? No. There is no requirement to have a separate summary for each issuer/guarantor. The summary will, however, need to contain key information regarding each issuer/guarantor. Do the new rules on prospectus summaries affect wholesale issues/wholesale programmes? In some respects, yes. Under the Prospectus Directive, a summary is not required for a wholesale issue. However, ESMA s view is that, where a summary is included in a prospectus for the listing of a debt security with a denomination of at least 100,000 (or its equivalent) (either because this is required by a member state in accordance with Article 19.4 of the Prospectus Directive or on a voluntary basis), the disclosure requirements described above for that summary should apply but only if it is called a Summary. This view has been reinforced in the Part I Regulation. Where an issuer is not required to include a summary in a prospectus but wishes, nonetheless, to produce an overview section in the prospectus, it should ensure that it is not referred to as a Summary to avoid having to comply with the new disclosure requirements for summaries. This is often the case for a prospectus prepared for a U.S. targeted issue, whether Rule 144A or SEC registered. Frequently asked questions on the Prospectus Amending Directive 12

13 Part 4 Retail Cascades What does the term retail cascade mean? The term retail cascade is used to describe a distribution mechanism whereby low denomination debt and equity securities are offered to retail investors by a distribution network of financial intermediaries (rather than by the issuer (or the underwriters) directly). Is a new prospectus required to be prepared for an offer made pursuant to a retail cascade? Normally each person making an offer of securities must produce a prospectus unless the offer is within one of the exemptions set out in the prospectus directive on the basis that each offer is a separate offer. However, ESMA has confirmed that a new prospectus is not required to be prepared for a retail cascade so long as the relevant prospectus is still valid at the time of the retail cascade and the issuer (or the person responsible for the prospectus if this is not the issuer) consents to the use of its prospectus by a third party. It is important to note however, that a new prospectus shall be required if such third party does not comply with any conditions attached to the issuer s consent to the use of its prospectus. What form should the issuer s consent take? The issuer s consent to the use of its prospectus by a third party should be in writing and included in the relevant prospectus or base prospectus. ESMA has advised that the issuer should disclose in the relevant prospectus or base prospectus: > that the issuer consents to the use of the prospectus for public offers of its securities by financial intermediaries together with any conditions attached to the consent. ESMA has advised that, in the case of the Individual Consent Approach (as defined below), any conditions attached to the consent may, in the case of a programme, be included in the relevant final terms; > that the issuer s responsibility for the content of the prospectus will extend to any public offers of its securities by financial intermediaries that have been granted consent to use the prospectus; > the period for which consent to use the prospectus for public offers of its securities by financial intermediaries is granted; > the offer period upon which public offers or sub-offers of its securities can be made by financial intermediaries. In the case of a programme, ESMA has advised that this information may be disclosed in the relevant final terms if the information is not known at the time the base prospectus is approved; > the Member States in which financial intermediaries may use the prospectus for public offers of its securities; and Frequently asked questions on the Prospectus Amending Directive 13

14 > a bold notice informing investors that information on the terms and conditions of the offer by any financial intermediary will be provided at the time of any such offer by the financial intermediary. In addition, certain other requirements relating to information to be disclosed to investors vary depending on whether the relevant financial intermediary, when subsequently reselling or placing the securities, is acting (i) in association with the issuer, on the basis of an individual agreement between the parties involved (the Individual Consent Approach ), or (ii) independently from the issuer, on the basis of the issuer s general consent to rely on its initial prospectus (the General Consent Approach ). The Part II Regulation reflects all but one of ESMA s advice set out above. The Part II Regulation states that any conditions attached to the issuer s consent to the use of its prospectus may, in the case of a programme, be included in the relevant final terms (without limiting this flexibility to the Individual Consent Approach only). What are the additional disclosure requirements specific to the Individual Consent Approach? The identity of the financial intermediaries (name and address) that are granted consent to use the prospectus or a base prospectus must be included in the relevant prospectus or base prospectus. In the case of a base prospectus, this information may be disclosed in the relevant final terms if the information is not known at the time the base prospectus is approved. In addition, ESMA acknowledges that certain information regarding financial intermediaries under the Individual Consent Approach may only be known after the prospectus or base prospectus has been approved by, or final terms filed with, the competent authority (e.g. information on the identity of (additional) financial intermediaries where the group of financial intermediaries appointed on an issue of securities would change frequently). In this case, the information may be published at a later date in the manner provided for in Article 14.2(c) of the Prospectus Directive (i.e. on the issuer s and the relevant financial intermediaries websites). The prospectus or base prospectus should indicate where the new information will be published when available. ESMA has confirmed that this information should have no effect on the assessment of the securities and should therefore, not trigger the requirement for a supplement. However, in the event that such information does constitute a new factor, material mistake or inaccuracy relating to information in the prospectus which is capable of affecting the assessment of the securities, the issuer would then need to publish a supplement in accordance with Article 16 of the Prospectus Directive. ESMA has also confirmed that the underlying written agreement between the issuer and the relevant financial intermediaries does not need to be disclosed to investors as it contains provisions which are only relevant to the parties to the agreement. Frequently asked questions on the Prospectus Amending Directive 14

15 What are the additional disclosure requirements specific to the General Consent Approach? An issuer is required to include in the prospectus a bold notice informing investors that any financial intermediary that wishes to rely on the issuer s consent to the use of its prospectus and meets any relevant conditions attached thereto shall publish on its website the fact that the financial intermediary is relying on the issuer s prospectus for its offer of securities with the consent of the issuer and the conditions attached thereto. ESMA has advised that the financial intermediary must also inform investors that the prospectus has been published and where it can be obtained. Although the Part II Regulation is silent on this requirement, we think it is good practice to follow ESMA s advice on this. What about information relating to the terms and conditions of the offer by a financial intermediary does this need to be included in the prospectus or base prospectus? ESMA acknowledges that offers or sub-offers made within a retail cascade may be made by different financial intermediaries over a period of time. As a result of this, it may not be possible for an issuer to include in the prospectus or base prospectus information on the terms and conditions of the offers or sub-offers to be made by the financial intermediaries (e.g. because the information may not be known at the time the prospectus or base prospectus is approved by, or the relevant final terms filed with, the competent authority). This is particularly relevant to public offers of securities by financial intermediaries acting independently from the issuer (i.e. under the General Consent Approach). ESMA has therefore concluded that, with the exception of information on the duration and location of the offers and sub-offers, all the other information required by Item 5 of Annex V of the PD Regulation (or Item 5 of Annex XII etc.), may be omitted from the prospectus or base prospectus/final terms. The information may be provided by the financial intermediaries to the investors at the time of the relevant offer and each financial intermediary must accept responsibility for the information that it provides. Frequently asked questions on the Prospectus Amending Directive 15

16 Part 5 Certain other amendments to the PD Regulation Information on Taxes withheld at Source for Retail Debt or Equity Securities What are the changes to the prospectus disclosure requirement on information on taxes withheld at source? The Part II Regulation does not amend the PD Regulation relating to the prospectus disclosure requirement on information on taxes withheld at source. The PD Regulation will continue to require that a retail debt or equity prospectus include, inter alia, information on taxes on the income from the securities withheld at source in respect of the country of registered office of the issuer and the countries where the offer being made or admission to trading is being sought. However, ESMA s FAQs on the common positions agreed by ESMA members on prospectuses stated that the wording information on taxes on the income from securities withheld at source refers to information on any amount withheld at source, that is, by the issuer or by any agent appointed by it for the purpose of making payment on the securities. Market participants were of the view that this suggests tax disclosure need only be included in the prospectus in respect of the issuer s jurisdiction and that of any paying agent of the issuer. ESMA has now confirmed in the Part II Technical Advice that it does not agree with this narrow interpretation. Does this mean that a full disclosure of the tax regime in each country where the offer takes place is required in the prospectus? No, ESMA acknowledges that the ultimate net amount that an investor may receive may depend on circumstances specific to that individual investor and is therefore not knowable by the issuer at the time of payment (e.g. fees payable by the custodian). ESMA has therefore indicated that it will revise FAQ No. 45 to further clarify its guidance. As the Part II Regulation does not address this issue, we will have to wait for ESMA to publish its updated guidance to know what additional information ESMA thinks should be included in the prospectus. Indices composed by the Issuer and related parties on Index-Linked Securities What are the changes to the prospectus disclosure requirement on indices composed by the issuer on index-linked securities? The PD Regulation will continue to require that a prospectus includes, inter alia, a description of the index if it is composed by the issuer (i.e. proprietary index). ESMA has advised that this requirement should not be removed from the PD Regulation in order to ensure that the information is set out in the most easily accessible way for investors. In addition, ESMA is of the view that an index composed by the issuer itself constitutes a clear conflict of interest and it is mandatory to describe such conflict of interest in the prospectus pursuant to Item 3.1 of Annex XII of the PD Regulation Frequently asked questions on the Prospectus Amending Directive 16

17 ESMA acknowledges that the term description of the index is open to interpretation and that prospectus disclosure diverges between a complete set of rules of the index and a more general, non-technical description. ESMA has indicated that it will publish further guidance on the meaning of the term description of the index as necessary. In addition, ESMA has advised in the Part II Technical Advice that a description of the index should also be included in the prospectus where the index is composed by an entity belonging to the same group as the issuer (e.g. where the index is composed by a subsidiary of the issuer). ESMA is of the view that this too constitutes a clear conflict of interest and it is also mandatory to describe such conflict of interest in the prospectus. The Part II Regulation has adopted ESMA s advice on this. In the context of a programme, does this mean that an exhaustive list of proprietary indices must be included in the base prospectus? No, ESMA recognises that issuers may not be in a position to include an exhaustive list of proprietary indices in the base prospectus. ESMA has indicated that it will publish further guidance on situations when a supplement may be used for the purpose of introducing a new proprietary index. What if the index is not composed by the issuer or an entity belonging to the same group as the issuer but merely by an entity acting in association with, or on behalf of, the issuer? If the index is composed by an entity that is acting in association with, or on behalf of the issuer (e.g. where the issuer is a repackaging vehicle and the index is composed by an associated entity), ESMA has advised that a description of the index is not required if the issuer states in the prospectus that: > the complete set of rules of the index and information on the performance of the index are freely accessible on the issuer s or on the index provider s website; and > the governing rules (including methodology of the index for the selection and the re-balancing of the components of the index, description of market disruption events and adjustment rules) are based on a pre-determined and objective criteria (i.e. they cannot be amended at the discretion of the issuer). If the issuer is not able to comply with the above requirement then a description of the index must be included in the prospectus. ESMA has advised that there is a clear presumption that this constitutes a conflict of interest and that such conflict of interest needs to be described in the prospectus. ESMA has also advised that, where an issuer (which does not itself compose the index) may enter into derivative transactions with the index provider or a member of its group, it would expect disclosure of this fact in the prospectus. In addition, ESMA has indicated that, if practical issues arise in the future with Frequently asked questions on the Prospectus Amending Directive 17

18 regard to the term acting in association with, it will issue further guidance on the meaning of the term. Profit Forecasts and Estimates on Retail Debt or Equity Securities What are the changes to the prospectus disclosure requirement on profit forecasts and estimates? The PD Regulation will continue to require that any profit forecasts or estimates included in a retail debt or equity prospectus should be accompanied by a report prepared by independent accountants or auditors. The report must state that, in the opinion of the independent accounts or auditors, the forecast or estimate has been properly compiled on the basis stated and that the basis of accounting used for the profit forecast or estimate is consistent with the accounting policies of the issuer. ESMA has advised that this requirement should not be removed from the PD Regulation on the basis that the report represents an added value to investors (i.e. the requirement for a report helps to ensure that the forecast or estimate has been properly prepared and adds credibility to the forecast or estimate). However, the Part II Regulation (which adopts most of ESMA s advice) has clarified that a report is not required where the financial information relates to the previous financial year and only contains (a) non-misleading figures substantially consistent with the final figures to be published in the next annual audited financial statements for the previous financial year and (b) the explanatory information necessary to assess the figures, provided that the following statements are included in the prospectus: (i) (ii) (iii) that the person responsible for the financial information, if different from the one who is responsible for the prospectus in general, approves such information; that the independent accountants or auditors have agreed that the financial information is substantially consistent with the final figures to be published in the next annual audited financial statements; and that the financial information has not been audited. ESMA has indicated that it will publish further guidance on when financial information would comply with the above criteria. We hope that the guidance would confirm that certain preliminary statements may be included in full in prospectuses without falling within the definition of profit estimate in Article 2.11 of the PD Regulation (and do not need to be accompanied by a report prepared by independent accountants or auditors) as long as the prospectus contains the above statements (i) to (iii). Frequently asked questions on the Prospectus Amending Directive 18

19 Part 6 Timing and what to do next When do the new rules apply? The Part I Regulation and the Part II Regulation and any further amendments to FSMA will not take effect until 1 July Therefore, the new requirements set out in these regulations do not apply to any prospectus that has been approved prior to that date. Article 2 of the Part I Regulation and Part II Regulation also clarify that the new disclosure requirements will not apply to any supplement to a prospectus (or base prospectus) where the prospectus or base prospectus to which the supplement relates was approved prior to 1 July Equally, a passporting notification after 1 July 2012 should clearly indicate the fact that the prospectus or base prospectus was approved before 1 July 2012 and is therefore not subject to the new requirements. If an issuer updates its base prospectus before 1 July 2012, how does grandfathering work? For some issuers, updating a base prospectus before the new rules come into effect may be advisable - particularly those issuers whose programmes are due to be updated shortly after 1 July By doing so, an issuer with a retail programme will avoid (amongst other things) having to rewrite its current form of summary, produce an issue-specific summary and comply with the new rules relating to retail cascades for another year. It should be remembered, however that competent authorities may be deluged with base prospectuses for approval in June This may cause a bottleneck and lead to timing delays with the approval process. Therefore time will be an important factor on such an update, in particular taking into account that there are only a few weeks left before the 1 July deadline. For issuers with both retail and wholesale programmes, it is worth remembering that ESMA indicated in the Part I Technical Advice, that the restrictive approach towards what may be included in final terms in many respects merely implements its interpretation of existing law. Some competent authorities are, as a consequence, already implementing some aspects of the restrictive approach. Therefore issuers may wish, even where they hope for approval of their base prospectuses prior to 1 July 2012, to review their terms and conditions to ensure that they contain a broad range of optional clauses and sufficient flexibility within each clause to ensure that trades can be executed quickly and without the need to amend or supplement the base prospectus or produce a drawdown prospectus. Does any of this apply to issues listed on the unregulated or exchange-regulated markets e.g. the PSM and Euro MTF? Strictly speaking these new requirements will only apply to prospectuses produced for the purposes of a public offer in the EEA or a listing on an EEA regulated market. This may mean that by listing securities on an exchangeregulated market, the new requirements can be avoided. However, any competent authority may choose to apply some (or all) of these requirements Frequently asked questions on the Prospectus Amending Directive 19

20 to its exchange-regulated market. So this may not necessarily provide a way to avoid the new requirements. Frequently asked questions on the Prospectus Amending Directive 20

21 SCHEDULE PROSPECTUS REQUIREMENTS LEGISLATION TREE PROSPECTUS DIRECTIVE 2003/71/EC PUBLISHED 4 NOVEMBER 2003 IMPLEMENTATION BY 1 JULY 2005 PROSPECTUS DIRECTIVE REGULATION (EC) NO. 809/2004 PUBLISHED 29 APRIL 2004 APPLICABLE FROM 1 JULY 2005 PROSPECTUS DIRECTIVE AMENDING DIRECTIVE 2010/73/EU PUBLISHED 11 DECEMBER 2010 IMPLEMENTATION BY 1 JULY 2012 AMENDMENTS TO FSMA 2000: - INCREASED THRESHOLD AMOUNTS BEFORE PROSPECTUS REQUIRED APPLICABLE FROM 31 JULY 2011 DELEGATED ACTS TO EUROPEAN COMMISSION COMMISSION MANDATE TO ESMA JANUARY 2011 DRAFT AMENDMENTS TO FSMA 2000 PUBLISHED FOR CONSULTATION DECEMBER 2011 TECHNICAL ADVICE ON PART I OF MANDATE (FINAL TERMS AND SUMMARIES) OCTOBER 2011 TECHNICAL ADVICE ON PART II OF MANDATE (RETAIL CASCADES, WHT ETC.) END FEBRUARY 2012 DRAFT PART I REGULATION (AMENDING REG 809/2004) MARCH 2012 DRAFT PART II REGULATION (AMENDING REG 809/2004 JUNE 2012 ALL LEGISLATION TO TAKE EFFECT 1 JULY 2012 Frequently asked questions on the Prospectus Amending Directive 21

22 Useful Background Reading Click here to view our client memorandum on the PD Amending Directive. Click here to view our client memorandum on the Part I Technical Advice. Click here to view our client memorandum on the Part II Technical Advice. Click here to view our client memorandum on the Part I Regulation Contacts For further information please contact: Mairéad Ní Dhonncha Counsel (+44) mairead.ni_dhonncha@linklate rs.com Grace Wee Managing PSL (+44) grace.wee@linklaters.com Author: Mairéad Ní Dhonncha and Grace Wee This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2012 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. One Silk Street London EC2Y 8HQ Telephone (+44) Facsimile (+44) Linklaters.com Frequently asked questions on the Prospectus Amending Directive 22 A /2.0/08 Jun 2012