ESMA publishes Part II Technical Advice on Retail Cascades and certain provisions of the Prospectus Regulation

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1 March 2012 ESMA publishes Part II Technical Advice on Retail Cascades and certain provisions of the Prospectus Regulation Overview 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 Amending Prospectus Directive. On 4 October 2011, ESMA submitted its Technical Advice on Part I of the mandate relating to, inter alia, (i) the format and content of final terms to a base prospectus and (ii) prospectus summaries required for low denomination debt and equity prospectuses to the European Commission (the Part I Technical Advice ). Click here to view our client memorandum on the Part I Technical Advice. Click here to view the Part I Technical Advice. Contents Overview... 1 ESMA s Advice on the Consent to use a Prospectus in a Retail Cascade... 2 ESMA s Advice on certain provisions of the Prospectus Regulation... 5 On 29 February 2012, ESMA submitted its Technical Advice on Part II of the mandate relating to: (i) (ii) the consent to use a prospectus in a retail cascade; 1 and review of the provisions of the Prospectus Regulation relating to information on taxes withheld at source, indices composed by an issuer, profit forecasts and estimates and audited historical financial information, to the European Commission (the Part II Technical Advice ). Click here to view the Part II Technical Advice. The Part II Technical Advice reinforces ESMA s position set out in its December 2011 consultation paper 2 : (i) Consent to use a Prospectus in a Retail Cascade: an issuer s consent to the use of its prospectus by a third party should be included in the relevant prospectus or base prospectus; and 1 2 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 directly). The term applies to both types of market practice in the area, where: (i) the securities are sold by the issuer to financial intermediaries on the primary market (e.g. on the basis of a subscription or underwriting agreement) and subsequently resold by the financial intermediaries to retail investors in the secondary market and (ii) the securities are placed by the financial intermediaries without any previous underwriting or acquisition of the securities. Click here to view the December 2011 consultation paper. 1

2 (ii) Information on Taxes Withheld at Source for Low Denomination Debt or Equity Securities: market participants were of the view (based on ESMA FAQ No. 45) 3 that no tax disclosure was required to be included in a prospectus in respect of a country where a public offer has been made, but where the issuer is not acting as, nor has appointed, a paying agent. ESMA does not agree with this interpretation of FAQ No. 45 on the meaning of information on taxes on the income from securities withheld at source and intends to revise FAQ No. 45 accordingly. Implications for debt issuers ESMA has clarified in the Part I Technical Advice that its new approach to prospectuses and base prospectuses will be applied by a competent authority after the date of entry into force of the delegated acts (i.e. 1 July 2012). Therefore, frequent issuers of low denomination debt securities may wish to update their debt issuance programmes prior to 1 July 2012 to avoid the requirements relating to retail cascades for another 12 months. Frequent issuers of low denomination debt should be aware that ESMA does not agree with the view taken by market participants that no tax disclosure is required to be included in a prospectus in respect of a country where a public offer has been made, but where the issuer is not acting as, nor has appointed, a paying agent. ESMA has indicated that it will revise FAQ No. 45 to further clarify its guidance. ESMA s Advice on the Consent to use a Prospectus in a Retail Cascade An issuer s consent to the use of its prospectus by a third party should be included in the relevant prospectus or base prospectus from 1 July ESMA s understanding of current market practice in a retail cascade is that financial intermediaries, when subsequently reselling or placing the securities, may act either (i) in association with the issuer, on the basis of an individual agreement between the parties involved (the Individual Consent Approach ), or act independently from the issuer, on the basis of the issuer s general consent to rely on its initial prospectus (the General Consent Approach ). 4 Individual Consent Approach: In this case, an issuer is required to include in the prospectus the identities of the financial intermediaries that are granted consent to use the prospectus or base prospectus together with any conditions attached to such consent. 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 3 4 FAQ No ESMA considers 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. ESMA acknowledges that market practice differs to some extent from the notion set out in its December 2011 consultation paper that financial intermediaries are always known by, or acting in association with, the issuer. 2

3 the parties to the agreement. In the case of a base prospectus, certain information that is not known at the time the base prospectus is approved may be included in the relevant final terms. See Information that may be Disclosed in Final Terms below. ESMA acknowledges that certain information 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). See also Requirement of a Supplement below. General Consent Approach: An issuer is required to include in the prospectus a general consent to use the prospectus together with any conditions attached to such consent. This general consent constitutes an offer by the issuer to any financial intermediary (that meets any relevant conditions) to use and rely on the issuer s prospectus. Any financial intermediary wishing to accept this offer shall publish on its website the fact that the financial intermediary is relying on the prospectus for its offer of securities with the consent of the issuer. The financial intermediary must also inform investors that the prospectus has been published and where it can be obtained. As there is no separate underlying individual written agreement between the parties involved (as would be the case for the Individual Consent Approach), ESMA considers it essential that any information on retail cascades, including any conditions attached to the consent, must (other than information on the offer period upon which public offers or sub-offers of securities can be made by financial intermediaries) be included within the prospectus or base prospectus itself. Information to be Disclosed in the Prospectus: ESMA has advised that the issuer should disclose in the 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; > 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 or a place holder in the form of final terms for such information to be disclosed in the relevant final terms (see also Information that may be Disclosed in Final Terms below); 5 5 The issuer should ensure that this period corresponds to, or is covered by, the period it granted consent to use the prospectus. 3

4 > the Member States in which financial intermediaries may use the prospectus for public offers of its securities; > 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 (see also Terms and Conditions of Offers or Sub-Offers below); > in the case of the Individual Consent Approach only, (i) the identity of the financial intermediaries (name and address) or a place holder in the form of final terms for such information to be disclosed in the relevant final terms (see also Information that may be Disclosed in Final Terms below) and (ii) where new information on financial intermediaries that is not known at the time the prospectus is approved may be obtained i.e. on the issuer s and the relevant financial intermediaries websites in accordance with Article 14.2(c) of the Prospectus Directive (see also Requirement of a Supplement below); and > in the case of the General Consent Approach only, that (i) a general consent is granted to relevant financial intermediaries and (ii) any financial intermediary that meets the relevant conditions and wishes to rely on the issuer s prospectus shall publish on its website that it is relying on the prospectus for its offer of securities with the consent of the issuer. Information that may be Disclosed in Final Terms: In the case of a base prospectus, ESMA has advised that the final terms may, if the information is not known at the time the base prospectus is approved, disclose: > the offer period upon which public offers or sub-offers in a retail cascade can be made by financial intermediaries; and > in the case of the Individual Consent Approach only, the identity of the financial intermediaries (i.e. name and address) and any other conditions attached to the consent. Terms and Conditions of Offers or Sub-Offers: 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/final terms 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 Prospectus 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 4

5 investors at the time of the relevant offer and each financial intermediary must accept responsibility for the information that it provides. Requirement of a Supplement: In the context of the Individual Consent Approach, ESMA s view is that new information on financial intermediaries that is not known at the time the prospectus or base prospectus is approved by, or final terms filed with, the competent authority may be published at a later date. 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 s Advice on certain provisions of the Prospectus Regulation Information on Taxes Withheld at Source for Low Denomination Debt or Equity Securities: The Prospectus Regulation requires that a prospectus includes, 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. 6 ESMA s guidance on the meaning of 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 (see FAQ No. 45 above). Market participants have taken the view that this suggests that no tax disclosure needs to be included in the prospectus where taxes on the income of the securities have been withheld in a country where a public offer has been made but the issuer is not acting as, nor has appointed a, paying agent. ESMA has now confirmed that it does not agree with this narrow interpretation. However, 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 s position therefore is that it is not intended that a full disclosure of the tax regime in each country where the offer takes place is required in the prospectus. ESMA has therefore indicated that it will revise FAQ No. 45 to further clarify its guidance. Indices Composed by the Issuer on Index-Linked Securities: The Prospectus Regulation requires that an issuer of index-linked securities includes in the prospectus a description of the index if it is composed by the issuer (i.e. proprietary index). 7 ESMA has advised that this requirement should not be removed from the Prospectus Regulation in order to ensure that the information is set out in the most easily accessible way for investors. 6 7 Item 4.11 of Annex V of the Prospectus Regulation (or Item 4.11 of Annex III etc.). Contrast this to a third party issuer that issues securities linked to that same index. Such an issuer is simply required to include in the prospectus where information about the index can be obtained (i.e. Item of Annex XII of the Prospectus Regulation). 5

6 ESMA recognises that issuers may not be in a position to include an exhaustive list of proprietary indices in the base prospectus. ESMA indicated that it will publish further guidance on situations when a supplement may be used for the purpose of introducing a new proprietary index. Where the index is created by an entity that is acting in association with, or on behalf of the issuer, 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). The above situation would constitute a conflict of interest between the issuer and the index provider pursuant to Item 3.1 of Annex XII of the Prospectus Regulation. The ESMA paper clarifies that this conflict of interest would therefore need to be disclosed in the prospectus. In addition, if an issuer enters into derivative transactions with an index provider or a member of its group, this would also constitute a conflict of interest pursuant to the same rule and would need to be disclosed in the prospectus. Profit Forecasts and Estimates on Low Denomination Debt or Equity Securities: The Prospectus Regulation requires that any profit forecasts or estimates included in a prospectus should be accompanied by a report prepared by independent accountants or auditors. The report should state that in the opinion of the independent accountants 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 it will not remove this requirement from the Prospectus Regulation. However, ESMA considers that a report is not required for financial information (i.e. preliminary statements) which: (i) (ii) (iii) contains (a) non-misleading figures to be published in the next annual audited financial statements in relation to the previous financial year that has expired and (b) any significant explanatory information necessary to assess such figures; states the fact that the information has not been audited (or the prospectus must include such a statement); has been approved by the person responsible for such information if such person differs from the one which assumes liability for the prospectus in general; and 6

7 (iv) has been agreed by the statutory auditor (which means that the statutory auditor must be confident that the preliminary figures would be substantially consistent with the final figures). ESMA has therefore advised that the Prospectus Regulation should be amended accordingly. In addition, ESMA considers it appropriate that the prospectus should include a prominent statement setting out criteria (iii) and (iv) above. Audited Historical Financial Information: The Prospectus Regulation requires that an issuer of equity securities or depository receipts over shares includes in the prospectus audited historical financial information covering the latest three financial years and the audit report in respect of each year. ESMA has advised that it will not reduce the financial information disclosure to two years for these types of securities. Contacts For further information please contact: Mairéad Ní Dhonncha Counsel (+44) mairead.ni_dhonncha@linkla ters.com Grace Wee Managing PSL (+44) grace.wee@linklaters.com Authors: 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 7 A /1.0/22 Mar 2012