NEWSLETTER

June 2002

2. MEASURES AIMED AT INCREASING THE MARKET TRANSPARENCY AND EFFICIENCY

2.1. Transparency of transactions with related parties

One of the key issues to increase the market efficiency is to enhance its transparency by providing immediate, accurate and reliable information. As a reactive measure regarding the increasing social rejection to insider-dealing, information abuses and undue profits resulting therefrom, the applicable provisions to these matters have been updated, particularly with regard to transactions with related parties (both individuals and corporations) where conflicts of interest may arise.

Accordingly, the Bill deals specifically with the disclosure of such transactions, stating a new reporting requirement under which all listed companies must include in their annual financial statements and, in their semi-annual reports submitted to the National Securities Exchange Commission (Comisión Nacional del Mercado de Valores, “CNMV”), detailed and measurable information on all transactions undertaken with related parties.

Under the provisions contained in the Bill, the term “related parties” comprises: (i) shareholders with a significant shareholding; (ii) managers and directors; and (iii) legal entities or individuals acting on their behalf, belonging to the same group, or acting in concert with them. The term “transactions” refers to any transfer or exchange of resources, undertakings or business opportunities, between the company being subject to periodic reporting obligations (including its group) and any related party, regardless of the fact that a price was established for such transaction. The Minister of Economy may set forth additional requirements with regard to particulars to be published (i.e. details of the related parties concerned) and the procedure to be followed.

However, the Bill has lost the opportunity to add further safeguards such as requiring the formal approval of any transaction with related parties by the Shareholders’ Meeting or at least by the Board of Directors of the company carrying out such transactions.

2.2. Relevant Information

The Bill contains certain amendments to the current regulations and widens the concept of relevant information. According to its provisions, information will be deemed “relevant” if the disclosure of such information (i) may have an effect on a reasonable investor with regard to the purchase or transfer of securities or financial instruments; and (ii) consequently, may significantly alter the market price of such securities or financial instruments. Therefore, information must affect the decisions to be adopted by a “reasonable” investor with general professional knowledge and have a certain degree of specificity in order to have an impact on an investment decision.  Relevant information should be disclosed to the market as soon as possible by filing a prior written notice with the CNMV.

In this regard, it should be noted that the priority conferred to the CNMV implies that issuers of securities intending to distribute any material information to financial analysts, institutional investors, or the media, must previously furnish such information to the CNMV for the purposes of registering it as a relevant fact (hecho relevante). In addition, and according to the full disclosure principle, it should be noted that any relevant fact disclosed must be accurate, complete, reliable and, when appropriate, quantified, in order to avoid distortions in the securities price.

Notwithstanding the above, should the relevant issuer of securities consider that the disclosure of material information may affect its legitimate interests, it may immediately request from the CNMV the discharge of its disclosure obligation. The CNMV may exempt the issuer from the aforementioned obligations if it considers that such disclosure may cause a serious detriment to the relevant issuer, provided that the non-disclosure of the material information is unlikely to mislead the public with regard to essential facts and circumstances the knowledge of which is essential to evaluate the relevant securities.

In order to prevent any leak of information that may result in insider-dealing and to safeguard the confidentiality of the information until the CNMV discloses it to the public, the Bill imposes certain obligations on the issuers during the preliminary works and negotiations prior to any legal or financial transaction, such as, among others, (i) limiting the number of individuals dealing with the relevant information; (ii) informing them about their confidentiality duties; (iii) maintaining a duly updated register of the persons having access to the relevant information and the dates on which they had such acces; and (iv) supervising the evolution of their securities’ market price.

2.3. Privileged information and Chinese walls

The Bill sets forth a set of rules regarding privileged information and, regarding entities rendering investment services or giving advice in connection to investments in securities markets, adopts certain measures for the purposes of increasing the market efficiency and transparency.

In this regard, the Bill defines “privileged information” as all non-disclosed information of specific nature related to one or more negotiable securities or financial instruments or to one or more issuers of negotiable securities or financial instruments, which, if disclosed, might have had a significant influence on the price of such securities or financial instruments.

Any individual or entity in possession of privileged information must refrain from performing, whether directly or indirectly, for its own benefit or for and on behalf of a third party, any of the following activities:

to prepare or carry out any kind of transaction over the securities or financial instruments to which this information refers;
to disclose such information to third parties, other than within the ordinary scope of their work, profession or position;
to recommend a third party to purchase or assign such securities or financial instruments or to cause a third party to purchase or assign such securities or financial instruments based on this information.

Moreover, the Bill sets forth that all individuals or entities acting in the securities markets and, in general, anyone possessing privileged information, must keep such information confidential, without prejudice to the reporting and cooperation duties with judicial and administrative authorities. Therefore, any such individual or entity shall adopt appropriate measures to avoid any abusive or unfair use of said information, and, if it cannot be avoided, to remedy the consequences arising from such abusive or unfair use.

Among these measures, the Bill refers to the so-called Chinese walls as a system designed to hinder the flow of privileged information between the different areas of a company preventing eventual conflicts of interests among the different activities developed by a single company. To this effect, the Bill states that all investment services companies and entities acting in the market or giving investment advice must (i) distinguish and separate the different areas of activity within their organisation; (ii) establish appropriate information barriers between the mentioned areas; (iii) define an investment decision system ensuring that such investment decisions are autonomously adopted within each area; and (iv) prepare and keep updated a list of all securities or financial instruments about which privileged information is available, as well as a record of the persons who have access to such information, and the dates on which they had such access.

In addition, a specific provision is contained in the Bill in order to regulate the securities price manipulation. This provision expressly forbids any practice that may artificially alter the free setting of market prices. The Minister of Economy may provide ad exemplum a list of the practices that are considered as price manipulation.

2.4. Protection of customers of financial services

As mentioned above, protecting customers of financial services is one of the main purposes of the Bill. Three new institutions, the so-called Commissioners (Comisionados), have been created:

the Commissioner for the Protection of Banking Services’ Customers, assigned to the Bank of Spain (Banco de España);
the Commissioner for the Protection of Investors, assigned to the CNMV; and
the Commissioner for the Protection of Customers of Insurance Services, assigned to the General Directorate of Insurance and Pension Funds.

The Commissioner’s aim is to protect the rights of consumers of financial services by reviewing complaints submitted to them and by providing legal advice about their protection and transparency rights.

In addition, the Bill imposes on credit entities, insurance companies and Investment Services Companies the obligation to create a so-called Customer Service Department (Departamento de Atención al Cliente) within their organisation to attend the claims and complaints filed by their customers. Further, one or more of these entities or companies may jointly appoint a so-called Consumer Protection Officer (Defensor del Cliente), whose decisions on the claims and complaints received by him/her will be binding for the relevant entity or company.  It should be noted that customers’ claims and complaints must be submitted to the Customer Service Department or to the Consumer Protection Officer, prior to being addressed to the relevant Commissioner.

2.5. Other protection measures

In addition to the aforementioned measures, the Bill strengthens the general powers of the CNMV for the purposes of protecting the investors.  In this regard, the CNMV may sanction any entity failing to comply with the obligations set forth in the provisions of the Bill. The CNMV may also make public warnings regarding such conducts.

In line with this approach, and in connection with recent economic scandals, the Bill grants the Bank of Spain, the CNMV, and the General Directorate of Insurance and Pension Funds (Dirección General de Seguros y Fondos de Pensiones) the power to supervise and have access to the working papers of the auditors of listed companies subject to their control.

Regarding entities subject to transparency obligations, the Bill imposes on them the obligation to draft an Internal Code of Conduct, whereby they undertake to adopt the mentioned transparency measures and to duly update them. In this regard, fines can be imposed on investment, credit or insurance entities should its solvency be decreased as a consequence of a deficient administrative organisation or internal control procedure. It is worth noting that the CNMV must also draft its own Internal Code specifying the structure, functions and supervision procedures within its organisation.

Finally, it is important to mention that all penalties have been updated taking into account the new obligations established in the Bill with the ultimate purpose of protecting users of financial services.

3. STRUCTURAL MEASURES

The Bill contains several provisions aimed at restructuring the financial markets. In this section, we summarise those which refer to (i) the reform of the securities clearance and settlement systems; (ii) the insurance sector; (iii) the amendment of the credit union regime; (iv) the legal regime of the guarantees granted in favor of the EU central banks; (v) the creation of a new kind of fixed income securities; (vi) netting provisions; (vii) securitisation; (viii) venture capital companies; (ix) Internet and e-money; (x) collective investment institutions; and (xi) the Risk Information Centre (Central de Información de Riesgos).

These measures are mainly addressed to achieve the following objectives: (i) to avoid legal obstacles which may decrease the competitiveness of the Spanish financial markets; (ii) to ensure that the increase of the competition and the use of new information technologies do not leave financial services’ consumers unprotected; and (iii) to facilitate public savings’ access to the “real economy”, promoting economic growth and employment creation.

3.1. Securities clearance and settlement systems

In line with the present integration of the Spanish stock exchanges and securities markets managing companies into a sole holding company, the Bill envisages the creation of the Securities Registry, Clearance and Settlement Systems Managing Company (Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, the “Systems Company”) through the merger of the currently existing systems, namely, the Securities Clearance and Settlement Service (Servicio de Compensación y Liquidación de Valores), for securities listed in the Stock Exchanges, and the Spanish Debt Book Entry Central (Central de Anotaciones de Deuda Española), for public debt securities. The Systems Company will have the power to (i) keep and maintain the accounting registries of listed securities, and (ii) provide clearing and settlement services for both securities traded in the stock exchanges and public debt securities.

3.2. Insurance sector

The Bill implements certain EU Directives, among others, Directive 2000/26/EC on the approximation of the laws of the Member States relating to insurance against civil liability in respect of the use of motor vehicles. Thus, the adoption of this Directive has resulted in the proposed amendments to the Private Insurance Regulatory Act and Motor Vehicle Insurance Act (Ley de Ordenación y Supervisión de los Seguros Privados and Ley sobre Responsabilidad Civil y Seguro en la Circulación de Vehículos a Motor), creating the figure of the representative of the insurance company and setting forth provisions with regard to (i) damages occurred in other EU State Members when the vehicle is registered in Spain, or vice versa; and (ii) damages occurred in non-EU Member States. Measures regarding information exchange between supervisory bodies are also set forth in the Bill.

In addition, the Bill provides the removal of the Insurance Companies’ Liquidation Commission (Comisión Liquidadora de Entidades Aseguradoras), the public entity in charge of the liquidation of insurance companies under certain circumstances. The duties of this Commission  will be assumed by the existing Insurance Clearing Consortium (Consorcio de Compensación de Seguros).

3.3. Credit unions

The Bill amends the credit union (cooperativas de crédito) investment regime, allowing these entities to increase their industrial portfolio and  raise funds by issuing and/or receiving subordinated debt.

Under the current applicable provisions, tax benefits are granted to credit unions provided that certain requirements are met. The Bill redrafts these requirements to make them more flexible and credit unions are now entitled to: (i) hold securities representing the share capital of other non-credit union entities, not exceeding 25% thereof if the activities carried out by the non-credit union entities are not ancillary or subordinated to those rendered by the credit union; and (ii) carry out credit transactions with third parties (other than partners of the credit union) representing, in aggregate, more than 50% of the share capital of the credit union.

3.4. Guarantees granted in favour of EU central banks

The Bill establishes a new regime regarding guarantees granted in favour of the Bank of Spain, the European Central Bank, or other EU central banks, by means of amending the Bank of Spain’ Autonomy Act (Ley 13/1994, de 1 de junio, de Autonomía del Banco de España). This new regime sets forth that guarantees may be granted not only by means of creating a pledge or other kind of charges or encumbrances, but also by means of entering into any agreement over liquid assets, including money, for the purposes of guaranteeing the rights and obligations deriving from a future or actual transaction between the relevant entity and any of the aforementioned central banks.

The granting of these guarantees will not require the intervention of a Notary Public. However, these guarantees need to be granted in writing and to be recorded with the relevant registry by the relevant central bank.

Under bankruptcy (quiebra) or suspension of payments (suspensión de pagos) proceedings, the rights of the relevant central bank deriving from the aforementioned guarantees will rank ahead of any other rights in the amounts not exceeding the value of the collateral.

3.5. Territorial Bonds

The Bill creates a new category of fixed income securities, the so-called Territorial Bonds (cédulas territoriales). These bonds may be issued by credit entities holding credits against (i) public bodies, (among others, the State, the Autonomous Regions and the Municipalities); (ii) entities controlled by such public bodies; and (iii) other entities of similar nature within the Economic European Space. These bonds will be secured by the relevant credits against these entities and public bodies. The territorial bonds will be represented in book-entry form and may be listed in the securities markets.

3.6. Netting provisions

Under Spanish law and within bankruptcy (quiebra) proceedings, all transactions carried out by a company within the so-called claw-back period (período de retroacción) will be deemed null and void. This claw-back period may be declared by the Judge and will start on the date, prior to the Judicial declaration of the company’s bankruptcy, on which the Judge considers that the company was already bankrupt.

However, the Spanish Securities Market Act (Ley 24/1988, de 28 de julio, del Mercado de Valores, as amended in 1998), sets forth that financial transactions over derivatives carried out under a netting agreement, or the applicable provisions thereto, will not be affected by the aforementioned claw-back period or, among others, by: (i) the filing for a bankruptcy (quiebra) or suspension of payments (suspensión de pagos) proceedings; (ii) the insolvency; (iii) the liquidation; or (iv) the judicial administration of any of the parties thereto, its subsidiaries or branches, provided that (i) at least one of the parties thereto is a credit entity or an investment services company duly authorised under Spanish law; (ii) the netting agreement sets forth a single obligation comprising all the financial transactions arising therefrom; (iii) pursuant to this obligation, in the event of early termination, the parties will only be entitled to claim the netting balance resulting therefrom; and (iv) the netting agreement has not been carried out in fraud of creditors.

The Bill extends the scope of the netting provisions. In this regard, the netting provisions will be applicable not only to derivatives, but also to security loans, assignments in guarantee, guarantees and other direct or indirect guarantee transactions related to the netting agreement. In addition, the netting provisions will be applicable to transactions carried out over derivatives with public debt securities as underlying assets. However, the Bill does not seem to extend the application of the netting provisions to credit derivatives, at least in principle.

3.7. Securitisation

3.7.1. Mortgage transfer certificates

The Bill, by means of creating the so-called “mortgage transfer certificates” (certificados de transmisión de hipoteca), increases the possibilities of carrying out securitisation transactions. In this regard, loans and credits which do not comply with the applicable requirements to carry out securitisation transactions through mortgage securitisation funds (fondos de titulización hipotecaria) may now become part of the assets owned by asset securitisation funds (fondos de titulización de activos).

3.7.2. Assignment of credits with Public Bodies

To encourage and facilitate the assignment and securitisation of credits against Public Bodies, the Bill sets forth that the assignment of such credits will not be subject to the provision declaring null and void all transactions carried out during the claw-back period under bankruptcy (quiebra) proceedings, provided that certain requirements are complied with.

3.8. Venture capital companies

The provisions applicable to venture capital companies (sociedades de capital riesgo) will be significantly amended as a consequence of the enactment of the Bill.

The Bill redefines the corporate purpose of venture capital companies, for these entities are now allowed to maintain their holdings in the share capital of non-financial entities which were not listed in a stock exchange when such participations were acquired, and which may be listed thereafter.

Additionally, the Bill relaxes the incorporation requirements for venture capital companies by permitting contributions in kind to their share capital after their incorporation. In this regard, the minimum share capital which has to be subscribed is set at Euro 1,200,000.00, which has to be paid-in at a minimum of 50% upon incorporation. The remaining share capital has to be paid-in within the following three years.  Contributions in kind shall be limited to 10% of the share capital.

Finally, the Bill sets forth that venture capital companies may hold participations in companies belonging to their group or to their managing companies’ (sociedades gestoras) group, not exceeding, in aggregate, 25% of their assets, provided that such companies comply with certain transparency requirements.

3.9. Internet, related electronic means and e-money

With regard to agreements executed by Internet or by other related electronic means, the Bill must be put into context with the bill of the IT Services and e-commerce Act (Proyecto de Ley de Servicios de la Sociedad de la Información y de Comercio Electrónico). These bills expressly recognise the validity of agreements executed by Internet or other related electronic means (i.e. e-mail) which will be governed by further provisions to be enacted by the Spanish Government.

The Bill defines “e-money” as a monetary value which is (i) represented by a credit that may be claimed to the issuer; (ii) recorded by electronic means; (iii) issued against the reception of funds in an amount not under the monetary value issued; and (iv) accepted as payment means by companies other than the issuer.

In addition, the Bill creates the figure of the so-called “e-money entities” (entidades de dinero electrónico), the main purpose of which will be issuance of e-money. This may be carried out exclusively by credit entities provided that a prior authorisation has been granted.

3.10. Collective Investment Institutions

Certain aspects of the applicable provisions to Collective Investment Institutions (Instituciones de Inversión Colectiva) and to their management and depository companies have been amended. In addition, the applicable requirements to security loans executed by Collective Investment Institutions have been relaxed.

3.11. Risk Information Centre

The applicable regime to the Risk Information Centre (Central de Información de Riesgos) has been totally restated. Chapter VI of the Bill enacts a complete set of provisions, configuring the Risk Information Centre as a public service for the purposes of (i) providing Spanish credit entities, Spanish branches of foreign credit entities, Deposit Guarantee Funds (Fondos de Garantía de Depósitos), Mutual Guarantee Companies (Sociedades de Garantía Recíproca) and other entities, with information regarding credit risks; (ii) facilitating the supervision of the declaring entities; and (iii) contributing to the right performance by the Bank of Spain of its powers.

The declaring entities are those entitled to access the information registered with the Risk Information Centre and are obliged to provide the Risk Information Centre with data regarding credit risks deriving from its direct or indirect debtors, including credit risks on a consolidated basis. Credit risks will not only derive from loans or factoring transactions, but also from securities issues, financial instruments and other financial agreements.

Finally, it must be noted that the new provisions affecting the Risk Information Centre set aside certain aspects of the Spanish general regime on data protection, as the general right to opposition granted to the individuals affected by the data collected is no longer enforceable before the Risk Information Centre. Data regarding ideology, sex, religion, political affiliation, or race of individuals affected by the data collected will not be included in the information registered with the Risk Information Centre. In addition, the registered information must be accurate and updated constantly, the affected individuals given access  and the right to amend the incorrect information.