United Kingdom
Making company law clearer, more certain and accessible
The independent Company Law Review Steering Group (Group) published, on 26 July 2002, a White Paper setting out the UK Government's core proposals for major reform of UK Company Law (Law).
The proposed reforms are aimed at making the Law clearer, more certain and more accessible. Almost every area of the Law is being reviewed. The proposed amendments in the current treatment of overseas companies are of particular interest.
The Group's review of the foreign company regulation found it to be "needlessly complex" with significant scope for "simplifying the rules". The Group's main recommendations in this area were:
- the formulation of a single regime for foreign companies based on the existing concept of "place of business" and requirements of the EU's Eleventh Directive;
- the need for the regime to apply to all companies incorporated outside of Great Britain;
- only one registration should be required if an overseas company operates in Great Britain from a number of locations within a common management structure; and
- a simplification of the requirements concerning the disclosure of accounts.
Comments should reach the Group by 29 November 2002.
(Source: Company Law Review Steering Group, 16/07/02. For more, see the White Paper)
Reforming audit and accounting regulation
The UK parliament is considering a number of proposals for reform to its current audit and accounting policy and regulation. An interim report was tabled in the UK parliament during July 2002 listing a number of recommendations made by the Co-ordinating Group on Audit and Accounting Issues.
The recommendations proposed are designed to formulate tougher mechanisms to reinforce auditor independence. Some of the recommendations are similar in substance to that already enacted in the US in the form of the Sarbanes-Oxley Act 2002 and include:
- the establishment of an audit committee made up entirely of independent non-executive directors with the power to, amongst other things:
- make recommendations to shareholders as to the appointment of auditors; and
- underpin auditor independence by, for example, approving the purchase of non-audit services from the auditor;
- the extension of the principle of audit partner rotation from not only the partners but to other senior members of the audit team also;
- consideration in more detail of the need for further tightening of the rules governing auditors' provision of non-audit services to audit clients; and
- consideration by the Department of Trade and Industry and Treasury of the competition implications of a high concentration in the market of audit and accountancy services.
(Source: Coordinating Group on Accounting and Auditing Issues Interim Report to the Secretary of State for Trade and Industry, URN 02/1092, 24/07/02. For more, see the Interim Report)
Regulating hedge funds
The Financial Services Authority (FSA) has released a discussion paper on the regulation of hedge funds in the United Kingdom inviting comments on the current controls on selling and marketing of hedge funds and the regulation of UK-based fund managers who manage offshore hedge funds.
At present, no specific regulatory regime exists to govern the marketing of hedge fund products in the UK although it is regulated indirectly depending on the corporate structure and nature of the investment activity undertaken by the funds. The rules in the Conduct of Business sourcebook prohibit the free marketing of these funds to the general public. However, the funds may be marketed to intermediate or market counterparties. This greatly restricts the ability of hedge funds to market their products to the retail sector. While the UK is not a favoured domicile for hedge funds due to its unfavourable tax regime, there are many offshore funds that are managed by fund managers located in the UK. Such entities must obtain the authorisation of the FSA to act as fund managers or advisers. A lot of hedge funds have queried the need to comply with this requirement especially where the funds are not marketed to UK residents.
Therefore, the FSA is seeking comments on whether the present regulatory regime:
- for the marketing and selling of hedge funds should be changed to permit the marketing and selling of such funds to the retail sector; and
- is appropriate for UK domiciled fund managers.
In addition, the FSA is also considering whether to allow hedge funds to list on the stock exchange. 'Fund of funds' hedge funds are the only hedge funds able to list in the UK because the nature of the funds (ie, such funds invest in other hedge funds) means that they are able to meet the requirements in the Listing Rules.
(Source: FSA Press Release, PN/086/2002, 21/08/02.)
United States
A fundamental change in corporate governance - Sarbanes-Oxley Act 2002
The Sarbanes-Oxley Act 2002 (the Act) came into effect on 30 July 2002. Some provisions of the Act take effect immediately, while others require the promulgation of rules by the Securities Exchange Commission (SEC) and will be phased in over time.
The changes introduced by the Act are considered to be the most significant changes to the regulation of corporate governance in the US since the enactment of the Securities Exchange Act 1934 (the Exchange Act).
The Act applies to foreign issuers that are subject to the reporting requirements of the Exchange Act. It does not generally apply to issuers who are merely required to submit information under Rule 12g3-2(b) of the Exchange Act. As a separate matter, it is not clear whether the SEC will grant any exemptions from the new provisions to foreign private issuers.
Some of the many changes introduced by the Act include:
- requiring the chief executive officer (CEO) and chief financial officer (CFO) of an issuer to certify that financial statements filed with the SEC fairly present, in all material respects, the financial condition and results of operations of the issuer; and the effectiveness of internal controls;
- an obligation on issuers to disclose on a "rapid and current basis" and in plain English additional information required by the SEC concerning material changes in the financial condition or operations of the issuer;
- the reimbursement by the CEO and CFO of the issuer of bonuses, incentive and equity-based compensation including profits realised from the sale of the issuer's securities if an issuer is required to re-state its financial statements due to material non-compliance of the issuer, as a result of misconduct, with financial reporting requirements;
- a prohibition against the grant of personal loans by the issuer to the directors and executive officers except in limited circumstances;
- steps to ensure auditor independence such as:
- requiring that audit committees be responsible for the appointment and compensation of auditors;
- ensuring the independence of audit committee members ie, they cannot be affiliated with the issuer, or remunerated by the issuer other than in their capacity as a board member (or as a member of a board committee);
- prohibiting auditors from performing some types of non-audit services for their audit clients;
- requiring prior approval by the audit committee for the provision of non-audit services by the auditor;
- rotating the lead audit partner and lead review partner of the external auditor every five years; and
- the establishment of a new body called the Public Company Accounting Oversight Board to regulate auditors;
- the introduction of new rules to address conflict of interest issues that can arise where securities analysts recommend securities;
- making it a criminal offence if:
- a person knowingly destroys, alters, conceals or falsifies documents with the intent to influence official investigations;
- an accountant who conducts the audit knowingly and wilfully fails to keep audit papers for at least 5 years; and
- a CEO or CFO knowingly certifies false financial statements contained in periodic reports filed with the SEC.
Is this your personal view? Research analyst to certify
The SEC has released for comment a draft rule dealing with certification requirements for research analysts. The draft rule would require a broker or dealer to:
- certify that the views expressed in the research report accurately reflect the analyst's personal views; and
- disclose whether the analyst received compensation or other payments in connection with his or her recommendations or views.
As an alternative to the certification requirement, a research analyst can choose to provide a statement certifying that "part or all of the compensation he or she has received was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report." If the analyst receives such related compensation the:
- statement must include the source and amount of such compensation; and
- purpose of the compensation, and further disclose that such compensation may influence the recommendation in the research report.
All certifications are required to be clear and prominent. The comment period on the proposed rule closes on 23 September 2002.
Australian position
In Australia, although analysts are not required to certify that their views accurately reflect their personal views, the Corporations Act 2001 (post FSR) provides that a person must not engage in dishonest conduct in relation to a financial product or financial service in the course of carrying on a financial services business in Australia. If advice given by an analyst does not accurately reflect his or her personal views, then the analyst may be contravening the Act.
The Act also imposes disclosure obligations on persons who provide financial product advice to retail clients.
When providing personal advice (i.e. where the personal circumstances of the client are taken into account in formulating the advice) to retail clients, analysts must give clients a Statement of Advice which includes the fees and other benefits the analyst, the securities house or its associates will receive and discloses any interests (whether pecuniary or not) or associations that the house or its associates have in the provision of the advice. The issue of research by broking houses is unlikely to fall into this category.
When providing general advice (i.e. advice which is not personal advice) to retail clients, the analyst is required to warn the client that the advice has been prepared without regard to the client's personal circumstances and that the client should consider the appropriateness of the advice having regard to his or her own situation. If the advice relates to the acquisition of a particular financial product, the retail client must also be warned that he or she should obtain a product disclosure statement before deciding whether to acquire the product. There is no specific requirement to disclose fees.
There are currently no express disclosure obligations under the Act for people who advise wholesale clients. The Act provides that the regulations may impose disclosure requirements where a financial service is provided to a wholesale client. To date, no such regulations have been drafted.
In all cases, the general law may impose disclosure obligations on advisers. As a fiduciary relationship exists between providers of financial product advice and their clients, when giving personal advice advisers must disclose everything that might reasonably be regarded as relevant to the making of the investment decision, including any conflicts of interest (Daly v Sydney Stock Exchange (1986) 160 CLR 371). Whether this rule applies equally to general advice (or research) as well as personalised advice, has not been judicially tested.
Apart from the dishonest conduct provisions and the general law discussion, these obligations are subject to the 2 year FSR Act transition period. This means that providers of financial product advice must continue to comply with the pre-FSR provisions until 11 March 2004 (unless the provider entered the market after 11 March 2002 or has opted into the new regime). The pre-FSR law is similar, in that they require analysts to disclose fees and any other benefit or advantage that the adviser, the house and any associate has or will receive in making a "recommendation", however, it does not make a distinction between retail and wholesale clients, so that the obligations apply whenever an analyst makes a securities "recommendation which may reasonably be expected to be relied on" in relation to securities.
The CLERP 9 discussion paper was released on 18 September 2002. It makes recommendations and proposals for reform of the Corporations Act with respect to corporate disclosure, including the provision of advice by analysts.
The reforms recommended for analyst conduct are very limited and the current disclosure regime for analysts is unlikely to change substantially if the CLERP9 recommendations and proposals are adopted. It may be that the general duty to act "efficiently, honestly and fairly" (section 912A(1)(a) of the Act) will be extended to include disclosure of any financial interest that analysts or related parties have in the subject of their advice or recommendation. This would mean that a statutory general duty of disclosure will extend to the provision of advice (either personal or general) and whether or not the advice is given to retail or wholesale clients. This may not be a far-reaching change, depending on the reach of the duty that already exists under general law.
Also, if the recommendations are adopted, ASIC will be required to develop policy which prescribes the level and manner of disclosure which is required under this general duty.
(Source: SEC Proposed Rule, Release Number 33-8119, 2/8/02. For more, see the proposed rule)
Malaysia
Exempt dealer status for venture capitalists
The Securities Commission of Malaysia (SC) has issued guidelines to enable venture capital companies to obtain "exempt dealer" status. Companies holding an "exempt dealer" status will not be required to hold a dealer's licence under the Securities Industry Act 1983 and will be able to deal in limited types of unlisted securities as explained below.
The guidelines introduced as a result of the promulgation of the Securities Industry (Exempt Dealer) Order (No. 2) 2002, will confer on venture capital companies (VCC) and venture capital management corporations (VCMC) "exempt dealer" status if they adhere to certain conditions. To obtain "exempt dealer" status, VCCs and VCMCs must:
- register with SC as a VCC or VCMC;
- maintain minimum shareholders' funds of RM100,000; and
- have a designated person (ie, a director or a person who is in charge of investment decisions of the VCC or VCMC) who is a fit and proper person (ie, has not committed any offence involving fraud or dishonesty).
The exemptions granted to VCCs and VCMCs from the need to obtain a dealers licence are limited and only apply to dealing in unlisted securities (for VCCs); and dealings in unlisted securities and listed securities acquired or subscribed for prior to the listing of the securities (for VCMCs)
(Source: SC Press Release, 1/08/02.)
Singapore
Who can use "independent"?
The Monetary Authority of Singapore (MAS) has issued its proposed guidelines on the use of the term "independent" by financial advisers when they promote their services or use the term in respect of their advice or recommendations.
The proposed guidelines eschew a detailed prescriptive approach to determine when it is appropriate for a financial adviser to use the term "independent" and instead favour a principles-based approach. Currently, the use of the term "independent" is governed by regulation 34 of the Financial Advisers Regulation. To qualify as an "independent" financial adviser, the entity must:
- not receive any commission or other benefit from a product provider which may tend to create a bias in favour of the product or pay any commission to or confer other benefits upon its representatives which may tend to create a bias in favour of the product;
- operate freely from any direct or indirect restrictions relating to any investment product which is recommended; and
- operate without any conflicts of interest created by any connection to or association with product providers.
According to MAS the test to determine independence is "...whether a reasonable investor, knowing all the relevant facts and circumstances, would perceive the financial adviser as having conflicting interests with the investor and for the advice or recommendation not to be objective and impartial." The fact that a financial adviser is unable to meet the three criteria in regulation 34 does not preclude them from using the term "independent" if the commissions or other benefits received by the financial adviser are insignificant in terms of the overall value and size of that type of business conducted by the financial adviser. In the view of MAS, a financial adviser will not be "independent" if they only recommend or, are restricted to recommending, products of a single product provider.
(Source: Monetary Authority of Singapore Press Release, 30/07/02. For more, see the press release)
European Union
A common European standard for ATS
The Committee of European Securities Regulators (CESR) has released the common European standards for Alternative Trading Systems (ATSs).
The paper ses out the standards for ATSs in the European Economic Area with the aim of standardising the regulation of ATSs. (Eds: this follows from ongoing consultation on the appropriate standards for the regulation of ATS - see report in ITM 7)
These updated standards identify four key areas in which additional regulation is recommended in order to strengthen the two primary objectives of market integrity and investor protection. They are:
- notification;
- transparency;
- reporting rules; and
- prevention of market abuse.
A. Notification
Operators of ATS should be required to notify their home state regulator when they establish an ATS. In addition, operators should also be required to notify their home state regulator of the key features and any significant changes to the operation of the ATS. Information such as:
- the trading process;
- system design and management;
- types of instruments traded;
- number and types of users and how users access the system;
- clearing and settlement arrangements;
- how pre- and post-trade information is made available to users and the general public; and
- material changes to the above matters
are the types of information expected from operators.
B. Transparency
According to the CESR, to ensure transparency, the operator must make publicly available information about quotes and/ or orders displayed or advertised by users of the ATS. Information on completed transactions should also be made available to users. Further, arrangements should be in place to ensure that trading on the system is fair and orderly by providing for efficient pricing and the equitable treatment of users.
C. Reporting rules and prevention of market abuse
ATSs should be subject to additional reporting requirements to enable the relevant home state regulator to monitor their compliance with market integrity and conduct of business rules. To that end, the operators should have adequate arrangements to monitor user compliance with the contractual rules of the system and where required by their home state regulator, establish arrangements with that authority to facilitate monitoring of the markets in the instruments traded and the detection of market abuse.
The relevant ATS conducted by the operator must demonstrate to their home regulator that the system is capable of delivering the proposed service and have satisfactory contingency arrangements in the event of system disruption. The obligations and responsibilities for clearing and settlement of transactions should also be made clear with users.
(Source: CESR Press Release, CESR/02-117, 8/07/02.)
No choice of regulator
In a 'major flexing of its muscle' the European Commission (EC) has reversed the amendments put forward by the European Parliament (Parliament) to the proposed EU prospectus directive. Amongst other amendments, the EC's proposed changes take away from many companies the ability to choose which European authority can approve their prospectuses.
The main changes proposed by the EC compared with the EC's own original proposal are:
- the introduction of special EU rules for securities with a high minimum denomination (€50,000) so as to reduce the regulatory hurdles for securities designed to be traded by professionals;
- an adapted regime aimed at reducing complexity for small to medium sized companies issuing securities to the public for a small amount (eg. €500,000);
- the choice of single or split document format for the prospectus is left to the issuer;
- disclosure standards based on the International Disclosure Standards approved by the International Organization of Securities Commissions and schedules will be used to cater for the various security types and nature of the issuer.
- a new prospectus format for frequent issuers; and
- an effective regime for the "single passport" where the admission of securities to trading in one Member State will be adequate authority to trade them in each other Member State.
(Source: European Commission Press Release, IP/02/1209, 9/08/02.