Response to the European Commission’s Proposal
for a review of the Prospectus Directive (COM (2009) 491 final)
The European Structured Investment Products Association (eusipa) is the voice of the structured investment products industry in Europe. It acts as a forum for the exchange of best practices, development of industry self-regulatory standards and promotion of the interests of its members. eusipa today represents the major financial institutions active in the sector across Europe organized through its national member organizations in Germany, Italy, Switzerland and Austria.
Members of eusipa have a close interest in ensuring the Prospectus Directive achieves its core objectives of ensuring investor protection and market efficiency in the public offer and listing of securities in the EU. Members rely on the proper functioning of the Directive for the issuance of retail structured products on a pan- European basis. They make full use of the passporting opportunities afforded by the Directive, seeking prospectus approvals for issuance programmes across multiple Member States.
1. General
eusipa strongly welcomes the thorough review of the Prospectus Directive conducted by the European Commission over the last months. The Commission’s proposal published at the end of September takes up most of the deficiencies and weaknesses of the Directive that have become apparent in its practical application since 2005, including a number of points not yet included in the Commission’s Consultation Paper from January this year. However, the proposal still needs amendments in a limited number of points in order to fully reach the objectives behind the review process.
In its response to the Consultation on the review of the Prospectus Directive, eusipa had pointed to two core areas not covered by the original Commission’s proposal from January this year: the Registration Document regime and the rules on prospectus supplements. eusipa notes with great satisfaction that for each of these areas, one of its proposals has been taken up by the Commission.
However, two other proposals for each of the points are not included in the Commission’s proposal. In our view, this would mean that the Registration Document could still not realise its full potential to facilitate the offering or listing of securities on a frequent basis, and would result in the requirement for
supplements, and the right of investors to withdraw in the case of a supplement, going further than needed and justifiable.
Accordingly, we think that the following further amendments should be made in the Prospectus Directive:
2. Registration document regime
a. Tripartite format for base prospectuses
The possibility for a tripartite prospectus, comprising the registration document, securities note and summary, was created to ensure frequent issuers of securities had the possibility of the highest levels of efficiency in their prospectus obligations and its implementation has served issuers and investors well.
However, according to the predominant interpretation of the current text of the Directive, only stand alone prospectuses can be prepared on the basis of a three- part prospectus. Thus, issuers engaged in multiple issuance programmes using the base prospectus, which practically are the most frequent issuers of securities, have no possibility to make use of the tripartite format.
The absence of the tripartite disclosure regime thus leads to significant inefficiencies for issuers. The possibility to incorporate a registration document by reference does not provide the same degree of efficiency, as issuers are obliged to update their references each time the registration document is amended or substituted.
We would therefore suggest the following amendment of the Prospectus Directive:
Art 5 (3): Deletion of the wording “Subject to paragraph 4” at the beginning of the paragraph.
b. Passporting of the registration document
A further inefficiency in connection with the Registration Document is caused by the fact that the rules on passporting (Art 17) currently do not specify that the passport also applies at the level of the registration document as a stand alone document itself. Thus, most competent authorities do not accept the exclusive passporting of a registration document.
Accordingly, issuers that want to make use of the tripartite format and which are having securities approved in more than one EU member states generally have to have a separate registration document in all these countries, which results in unnecessary duplication of work, and has the potential to cause prospectus liability claims from investors in case the different authorities involved require diverging issuer descriptions.
Art 17 (1) of the Prospectus Directive should therefore be supplemented as follows: Without prejudice to Article 23, where an offer to the public or admission to trading on a regulated market is provided for in one or more Member States, or in a Member State other than the home Member State, the prospectus, in the form of a single document or separate documents including the registration document and forming part of a prospectus in accordance with Article 5(3), approved by the home Member State and any supplements thereto shall be valid for the public offer or the admission to trading in any number of host Member States, provided that the competent authority of each host Member State is notified in accordance with Article 18. Competent authorities of host Member States shall not undertake any approval or administrative procedures relating to prospectuses in the form of a single document or relating to separate documents including the registration document and forming part of a prospectus in accordance with Article 5(3).
3. Supplementary information regime
a. Addressing duplication with Transparency Directive
The supplementary information obligations under Art 16 of the Directive in many cases today duplicate reporting obligations under the Transparency Directive. This is the case notably for interim reports and insider information published by the respective issuer. For this kind of information, there is no need for the process prescribed by Art 16 (I), i. e filing with the competent authority and approval by this before publication, to apply, as this information is published anyhow according to the rules of the Transparency Directive, and is therefore made known to investors without a supplement according to the Prospectus Directive.
Removal of these duplicate requirements from the Prospectus Directive will significantly increase efficiency for issuers while maintaining the same level of public disclosure.
Accordingly, the following sentence should be added at the end of Art 16 (I): The obligation to file a supplement shall not apply if the issuer has published information under Directive 2004/109/EC that comprehensively describes the new factor that is relevant for the offer; in such case the issuer shall publish the information in accordance with at least the same arrangements as were applied when the original prospectus was published including a reference to the withdrawal right under Article 16(2).
b. Clarification of investor’s right of withdrawal
The wording of Art 16 (II) currently does not limit the investor’s right to withdrawal in case of a supplement to cases where the information detrimentally affects the assessment of the securities.
Accordingly, investors could use events positively affecting the securities’ assessment, like results which are better than expected by the markets, to withdraw for reasons completely unrelated to the information constituting the object of the supplement. This would almost be comparable to widening prospectus liability to circumstances having a positive impact on the market value of the securities.
According, Art 16 (II) should be replaced by the following: 2. Investors who have already agreed to purchase or subscribe for the securities before the supplement is published shall have the right, exercisable within two working days after the publication of the supplement, to withdraw their acceptances if the information contained in the supplement is detrimental to the investor in assessing the issuer and the securities which are the subject of the offer or the admission to trading on a regulated market or multilateral trading facility as defined by Council Directive 2004/39/EC. In the case of the publication of information under Article 16(1) last sentence the withdrawal right shall apply accordingly.
4. Proposed changes to the summary regime (Art 5 and 6)
Finally, the Commission’s proposal includes changes within Art 5 and 6 of the Directive regarding content of, and liability for, the prospectus summary. In short, the new rules would require the summary to contain “key information in order to enable investors to take informed investment decisions and to compare the securities with other investment products”, and would extent the liability for the summary accordingly.
These amendments would effectively require each summary to contain the necessary contents of a Key Information Document (KID), the introduction of which has been envisaged by the Commission’s Communication on Packaged Retail Investor Products (PRIPs). However, some of the securities covered by the Prospectus Directive will almost certainly not be treated as PRIPs, and made subject to the requirement to prepare a KID. This is case notably for shares, but also for “plain vanilla” bonds. In addition, the requirement for the production of KIDs is meant to be restricted to products offered to retail investors, whilst some of the securities for which a prospectus summary is made are distributed solely to professional investors. Accordingly, the scope of the rules on prospectus summaries, and that of a future KID requirement, are not identical, but differ substantially.
Even in the cases where a KID will have to be produced in future, it seems highly questionable if this could be combined with the summary, if this should have been the intention behind the proposed amendments. For example, it currently seems unclear if the KID, which is meant to provide investors with the key features and risks of a product, will contain sufficient information on the issuer of the respective security to comply with the necessary content of a summary in so far. On the other hand, if combining the two formats should not have been the intention, the proposed amendments would result in nothing more than a duplication of the new requirements proposed within the PRIPs Communication, without any recognizable benefit to investors.
Given the current stage of the PRIP discussion, it currently seems impossible to assess how the requirement for the production of KID will impact prospectus summaries, so that any amendments to Art 5 and 6 on this basis would be premature. Accordingly, the proposed amendments within Art 5 and 6 should not be taken over into the Prospectus Directive.