NEWSLETTER

November 2002

2.       MEASURES AIMED AT INCREASING THE MARKET TRANSPARENCY AND EFFICIENCY

2.1.    Audit Committee

One of the key issues in increasing market transparency and efficiency is the protection of investors through the improvement of the accuracy and reliability of corporate disclosures made pursuant to securities laws. Included amongst such public disclosures are accounting and financial statements and audit reports. In this regard, in response to the recently publicised international scandals and in line with the Sarbanes-Oxley Act in the United States, the new Act has seized the opportunity to update the regulation of audit activities in Spain and, in particular, to impose the obligation on all Spanish listed companies to create an Audit Committee.

Regarding this obligation, the Act has established that all listed companies must create an Audit Committee appointed by the Board of Directors, the majority of whose members must be non-executive directors (i.e., who are not also members of management). The President of the Committee shall be elected from amongst these non-executive directors and shall be replaced every four years. The number of members, rules of operation and responsibilities of the Audit Committee shall be set out in further regulations. However, the Act provides a list of the following essential functions to be performed by the Committee:

to provide information at the General Shareholders’ Meeting about the issues arising during the course of the meeting in connection with its responsibilities;

• to submit to the Board of Directors a proposal for the appointment of the external auditors of the company, which shall in turn be submitted to the General Shareholders’ Meeting;

• to supervise the internal auditing services, in the event that such services are provided within the company;

• to oversee the financial reporting processes and the internal control systems of the company;

• to maintain relations with the external auditors in order to remain informed on the audit process, audit law, regulations, and technical rules, as well as any issues which may compromise the auditors’ independence.

As for the general revision of audit activity regulation in the new Act, it is worth pointing out the following three issues:

1.        Prohibited activities: the Act specifies certain services which cannot be provided by the auditors contemporaneously with the preparation and issuance of the audit report of a company. Furthermore, auditors must appear to be, and must in fact be, independent of the companies on behalf of whom their audit firm issues audit reports. Auditors must refrain from auditing if their objectivity towards the accounting documents they are verifying is at risk. The Institute of Accounting and Auditing (Instituto de Contabilidad y Auditoría de Cuentas or “ICAC”) is the public body that must oversee the appropriate compliance with this duty of independence, and must assess the possible lack of independence of an auditor or an audit firm with respect to any audit work they may carry out.

In any event, the Act states that an auditor will not be considered sufficiently independent of the audited company in which he carries out his functions, if any of the following circumstances occur: (i) subject to certain conditions, the auditor holds an executive, management, employment or supervisory post in the audited company or in any other entity directly or indirectly related to the audit client; (ii) the auditor has a direct or indirect material financial interest in the audit client; (iii) the auditor has a consanguineous or family relationship with the managers, directors, or persons in charge of the financial or economic department of the audit client; (iv) subject to certain conditions, the auditor provides the audit client with certain specified services such as, inter alia, bookkeeping or other services related to its accounting records or financial statements, financial information systems design services, appraisal or valuation services leading to a subjective evaluation of significant portions of the financial statements, internal audit outsourcing services, and legal services simultaneously provided to the audit client or to any entity who had been client in the last three years unless such legal services are provided by different entities; (v) the auditor has business relationships with the audit client, unless in the ordinary course of the business of such client; (vi) the auditor participates in the appointment of managing directors or key staff for the audit client when such client is a listed company or a company subject to public supervision; (vii) services unrelated to the audit are provided to the audit client by the audit partner signing the audit report; (viii) the auditor receives fees deriving from audit or non-audit services rendered to a single client that represent an unduly high proportion of the total annual revenue of the auditor.

The above activities shall be prohibited during the three years prior to the year in which the financial statements are audited, except for the financial interest prohibition (in which case such conflict must be resolved before the appointment of the relevant auditor). In addition, during the three years following the end of their activities, the auditor may not be a member of any corporate body of the audited company, nor should he have any employment or financial interest in such company.

2.       Rotation measures: the Act provides that auditors may be appointed to audit a company for an initial fixed period of at least three years but not exceeding nine years from the beginning of the first fiscal year to be audited. Once such initial period has elapsed, the auditor’s appointment may be renewed annually.

However, with regard to entities subject to public supervision, listed companies, and companies with a net revenue exceeding Euro 30,000,000, the Act provides that lead audit partners (responsible for the audit work and the audit team) must rotate every seven years following the initial appointment. In addition, they shall not be appointed to audit the relevant company again until three years have elapsed since the time of their last rotation. Please note that the Act requires the rotation of the audit partner and not the audit firm.

The Act also provides that the audit report to be issued in special cases (e.g. mergers, capital increases, etc.) as required by law, must be prepared by an auditor other than the external auditor carrying out the general audit of the company.

3.       Transparency of auditors’ remuneration: auditors must notify annually to the ICAC the hours and fees invoiced per client, separating audit services from other, non-audit services rendered to the client. The amount of such fees shall be published and shall be specifically stated in the annual reports with a break-down of the fees paid to auditors and fees paid to any company belonging to the same group as the auditor or to which the auditor is related.

In connection with the above mentioned measures, the penalties applicable to auditors and the disciplinary regime to which they are subject have been significantly amended, with increased fines and stricter disciplinary proceedings. In line with this approach, the Act grants the Bank of Spain (Banco de España), the National Securities Exchange Commission (Comisión Nacional del Mercado de Valores, “CNMV”), the General Directorate of Insurance and Pension Funds (Dirección General de Seguros y Fondos de Pensiones) and the Court of Auditors (Tribunal de Cuentas) the power to supervise and have access to the working papers of the auditors of companies subject to their control.

2.2.    Transparency of transactions with related parties

In response to the public’s growing intolerance for insider-dealing and information abuses (and the unfair profits resulting therefrom), the provisions applicable to these matters have also been updated, particularly with regard to transactions with related parties (both individuals and corporations) where conflicts of interest may arise.

Accordingly, the Act deals specifically with the disclosure of such transactions, setting out a new obligation to report pursuant to which all listed companies must necessarily include in their half-yearly reports submitted to the CNMV detailed and quantitative information on all transactions entered into with related parties, indicating the type of transaction and identifying the related parties concerned. The Minister of Economy, or the CNMV when expressly authorised to do so, shall set forth the requirements with regard to particulars to be disclosed and the procedure to be followed.

However, the Act does not include any additional safeguards such as requiring the formal approval of such transactions by the General Shareholders’ Meeting or by the Board of Directors.

2.3.    Relevant Information

The Act 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 reasonably have a foreseeable effect on any 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 reasonably affect the decisions made by an 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 written prior notice with the CNMV and by means of a public disclosure on the Internet websites of the issuers of the negotiable securities involved. The length of the period during which the relevant information must be published on the Internet websites shall be determined by the CNMV.

In this regard, it should be noted that the priority conferred upon the CNMV implies that issuers of securities intending to distribute any material information to financial analysts, institutional investors, or the media, must previously have provided 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 or relevant information disclosed must be accurate, complete, reliable and, when appropriate, quantified, in order to avoid misleading or false news which may distort the price of the securities.

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 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 leaking 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 Act imposes certain obligations on issuers during the preliminary operations 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 access; and (iv) supervising the evolution of the market price of their securities.

2.4.    Inside information and Chinese walls

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

In this sense, the analysts and entities referred to above must refrain from carrying out the following activities under any circumstances:

perform activities which produce or whose aim is to produce an artificial evolution of market prices;

• increase and multiply dealings and transactions unnecessarily and without any benefit to the customer;

• lay claim to one or more securities that other clients have requested on the same or better terms;

• give priority to the sale of their own securities over the securities of customers who have ordered the sale of the same type of securities on identical or better terms.

In addition, the Act defines “inside information” as all specific non-public information directly or indirectly 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.

The above definition is also applicable to negotiable securities or other financial instruments for which listing on an organised market or system has been required.

Regarding financial derivative instruments on commodities, the Act considers as inside information all specific non public information directly or indirectly related to one or more of such derivative instruments that the participants in the relevant commodities market would expect to receive according to agreed market practices.

Any individual or entity in possession of inside information, acknowledging or which should have acknowledged the special nature of such 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:

the preparation or carrying out of any kind of transaction involving the securities or financial instruments to which this information refers;

• the disclosure of such information to third parties, other than within the ordinary scope of their work, profession or position;

• recommending to a third party to purchase or assign such securities or financial instruments or causing a third party to purchase or assign such securities or financial instruments based on this information.

However, the foregoing prohibitions shall not apply to transactions carried out in order to enforce monetary policy, exchange ratio policy or public debt management policy by a Member State of the European Union, the European Central Banks System, a national Central Bank or any other public body officially appointed to act on their behalf. The prohibitions shall not apply either to transactions on treasury stock carried out in the context of repurchase programs of the issuers or to stabilization of negotiable securities or financial instruments provided that such transactions are carried out in accordance with the conditions set forth in the regulations.

In addition, the Act establishes that public organisms providing statistics which may have material consequences for the financial markets shall disclose such statistics in a suitable and transparent way.

The Act also sets forth that all individuals or entities acting in the securities markets and, in general, anyone possessing inside information, must keep such information confidential, without prejudice to the reporting and cooperation duties to 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 Act refers to the so-called Chinese walls as a system designed to hinder the flow of inside information between the different areas of a company preventing eventual conflicts of interests between the different activities performed by a single company. As such, the Act states that all investment firms and entities acting in the market or giving investment advice must (i) distinguish and separate the different areas of activity within their organisation, creating in particular separate areas for at least those departments carrying out activities of analysis, management of their own portfolio, or management of clients’ portfolios; (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 inside 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, all entities drafting, disclosing or publishing reports or recommendations on listed companies must behave in an honest and impartial manner, disclosing in such reports, publications or recommendations the relevant relationships between such entities and the relevant companies, and the stake such entities hold in the relevant companies.

2.5.    Price manipulation

A specific provision is also contained in the Act 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 Act considers the following practices as price manipulation:

transactions or orders (i) which provide or may give false or misleading signals regarding the offer, demand or price of negotiable securities and financial instruments; or (ii) which guarantee, through one or more individuals acting together, an unusual or artificial price of one or more financial instruments, except if the individual carrying out such transactions or orders proves his reasons are legitimate or in accordance with the market practices accepted in the relevant market;

• transactions or orders using fictitious devices or any other misleading form, scheme or plan;

• disclosure of information through the media (including the Internet) or any other means that results in misleading or false signals regarding financial instruments, including rumours or misleading news when the individual disclosing the information knew or ought to know that such information was untrue or misleading. The Act alludes particularly to professional journalists.

In addition, the Minister of Economy may provide ad exemplum a list of the practices that are considered as price manipulation.

2.6.    Protection of financial services customers

As mentioned above, protecting financial services customers is one of the main purposes of the Act. Three new institutions, referred to as Commissioners (Comisionados), have been created:

the Commissioner for the Protection of Banking Services Customers, assigned to the Bank of Spain;

• the Commissioner for the Protection of Investors, assigned to the CNMV; and

• the Commissioner for the Protection of Insurance Services Customers, assigned to the General Directorate of Insurance and Pension Funds.

The Commissioners’ 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 Act imposes on credit entities, insurance companies and investment firms the obligation to create a Customer Service Department (Departamento de Atención al Cliente) within their organisation to address the claims and complaints filed by their customers. Furthermore, one or more of these entities or companies may jointly appoint a so-called Consumer Protection Defendor (Defensor del Cliente), whose decisions on the claims and complaints received by him/her will be binding upon 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 Defendor, prior to being directed to the relevant Commissioner.

2.7.    Rules of conduct

The Act has made significant amendments to strengthen the rules of conduct within the securities market. In this regard, investment firms, credit entities and individuals or entities acting in the securities market by receiving or executing orders as well as advising on securities investments, must comply with three new principles included in the Act:

to guarantee equal treatment of all clients, avoiding giving priority to certain clients over others when issuing reports or giving recommendations.

• to refrain from taking investment positions in securities or financial instruments which are being subject to specific analysis, from the moment on which the conclusions of such analysis are issued until the recommendation or report thereof is disclosed.

• to notify clients of any possible conflict of interest arising from the advisory or investment services to be provided.

The above mentioned principles shall also apply to individuals or entities analysing securities or financial instruments, to the extent compatible with their activity.

2.8.    Other protection measures

In addition to the aforementioned measures, the Act increases the general powers of the CNMV for the purposes of protecting investors. In this regard, the CNMV’s functions and internal organisation have been significantly amended. A new corporate body, the Executive Committee, has been created in order to prepare the issues to be submitted to the CNMV’s Council, to discuss all matters suggested by the CNMV’s President and to generally coordinate the different corporate bodies within the structure of the CNMV. Furthermore, the functions and powers of each corporate body (Council, President, Vice-President, and Executive Committee) have been described in detail in the new Act. Likewise, a provision sets out the obligation of the CNMV’s staff to disclose, in accordance with the CNMV Internal Code, all transactions carried out directly or indirectly by them in the securities market. Limitations on sale and purchase of securities are also provided.

Regarding measures to protect investors, the CNMV may sanction any entity failing to comply with the obligations set forth in the provisions of the Act. The CNMV may also issue public warnings regarding such conduct. With regard to inside information, relevant information and price manipulation, the CNMV shall have jurisdiction over the supervision and sanctioning of (i) activities performed inside or outside Spanish territory relating to securities and financial instruments listed in Spanish markets, and (ii) activities performed inside Spanish territory relating to securities and financial instruments listed in an official regulated market of an EU Member State.

On the other hand, regarding entities subject to transparency obligations, the Act imposes on them the obligation to draft an Internal Code of Conduct whereby they undertake to adopt the said transparency measures and to duly update such Code. In this regard, fines can be imposed on investment firm, credit or insurance entities should their solvency be decreased as a consequence of 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.

In addition, the CNMV, the Bank of Spain, the Energy National Commission (Comisión Nacional de la Energía) and the Telecommunications Market Commission (Comisión Nacional del Mercado de Telecomunicaciones) must prepare an annual report on their respective supervisory functions, their internal control bodies, and the appropriateness of their decisions and procedures. This report must be approved by their corporate bodies and must be submitted to the Spanish Parliament and Government.

Likewise, the Act imposes a new obligation on investment firms and credit entities carrying out the deposit and management of securities or financial instruments, who must file with the CNMV every six months a report on such specific activity to be issued by an independent expert. The purpose of such report shall be to verify the balances and positions maintained by the clients in said investment firms or credit entities.

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

3.       STRUCTURAL MEASURES

The Act contains several provisions aimed at restructuring the financial markets. In this section, we summarise those which relate to (i) the reform of the securities clearance and settlement systems; (ii) the procedure for the suppression of pre-emption rights (derechos de suscripción preferente) in capital increases of Public Limited Companies (Sociedades Anónimas); (iii) the insurance sector; (iv) the new provisions regarding savings banks; (v) the amendment of the credit union regime; (vi) the legal regime of the guarantees granted in favour of the EU central banks; (vii) the creation of a new kind of fixed income security; (viii) netting provisions; (ix) securitisations; (x) venture capital companies; (xi) internet and e-money; (xii) collective investment schemes; and (xiii) the Risk Information Centre (Central de Información de Riesgos).

These measures are mainly designed 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 competition and the use of new information technologies do not leave consumers of financial services unprotected; and (iii) to facilitate the access of public savings to the real economy, promoting economic growth and the creation of employment.

3.1.    Securities clearance and settlement systems

In line with the present integration of the Spanish stock exchanges and the securities markets managing companies into a single holding company, the Act envisages the creation, within a period of six months, 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 on the stock exchanges, and the Office of Spanish Debt Registration (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 both public and private listed securities, (ii) provide clearing and settlement services for both securities traded on the stock exchanges and public debt securities, and (iii) provide operative and technical assistance related to clearing and settlement activities and any other services that may be necessary for the Systems Company to cooperate, coordinate its activities and, as the case may be, participate, with or in any other registry, clearance and settlement systems or entities.

3.2.    Pre-emption rights in capital increases of Public Limited Companies ("PLCs")

The Act amends the current regulation of the procedure for the suppression of the shareholders’ pre-emption rights in connection with capital increases in PLCs contained in section 159 of the Public Limited Companies Act (Ley de Sociedades Anónimas). Said amendments are designed to ensure that the procedure is transparent, and that the interests of the company are sufficient to justify the suppression of the shareholders’ rights. The main amendments to this procedure that should be highlighted are the following:

(a)      Unlisted companies: The Commercial Registry (Registro Mercantil) shall appoint an auditor (other than the company’s auditor) who shall prepare a report stating (i) the reasonable value (valor razonable) of the company's shares; (ii) the fair value of the pre-emption rights to be suppressed; and (iii) whether the company managers’ report prepared in connection with the suppression of the pre-emption right is reasonable or not. Additionally, the issue price of the new shares shall coincide with the reasonable value stated by the auditor.

Regarding the auditor’s report, we must state that the requirement of the valuation of the pre-emption rights set forth in the Act does not seem to be justified for unlisted companies. If the issue price of the new shares must coincide with the reasonable value of the relevant company's shares, the value of the pre-emption rights will be nil. Hence, the auditor's statement of the fair value of the pre-emption rights will only be reasonable in relation with listed companies, in which, as we describe below, the issue price of the new shares can be lower than their reasonable value under certain specific circumstances.

(b)      Listed companies: An auditor shall also be appointed in the terms and for the purpose referred to above, whose report shall also state the book value (valor neto patrimonial) of the company’s shares. The issue price of the new shares shall be equal to or higher than the book value stated by the relevant auditor. However, this does not imply that listed companies are allowed to issue shares at a price below their reasonable value in any case. Under ordinary circumstances, such an action would be deemed to harm the company’s interests, as it would lead to the dilution of the former shareholders. In this case, the agreement that provided for said issue would be voidable. Indeed, it is only under extraordinary circumstances in which the company’s interests so demands that listed companies can issue shares at a price below their reasonable value.

Regarding the book value of the company’s shares to be stated by the auditor, the Act provides that (i) its calculation shall be based on the company’s last audited financial statements, whether annual or quarterly, that shall not be dated more than six months before the date of the Shareholders’ Meeting called to pass the capital increase; (ii) it shall consider, as the case may be, any qualification (salvedad) to said financial statements made by its auditor; and (iii) if the relevant company is the parent company of a group, the book value shall be based on the consolidated accounts of said group.

In addition, for the Shareholders’ Meeting to delegate to the company’s managers the right to increase capital and suppress the relevant pre-emption right, it is provided that (i) the proposal to suppress the pre-emption right shall be expressly stated when the Shareholders’ Meeting is convened; (ii) the company’s managers shall prepare a report justifying said proposal; (iii) for each capital increase approved by the managers, both the auditor’s and managers’ relevant reports shall be prepared; and (iv) the issue price of the new shares shall coincide with the reasonable value stated by the auditor.

Finally, regarding the term reasonable value to which we have referred, it must be stated that it has been provided to substitute for the term real value both in the Public Limited Companies Act and in the Private Limited Companies Act. Both Acts have historically referred to the real value of the shares in various provisions. However, the meaning of said term has never been clear and has been subject to differing interpretations when it came to construing it. In view of this fact, the term has been substituted in both Acts with the term reasonable value, in order to try to clarify its meaning. It is uncertain whether the meaning of the new term will be clear or not when it comes to construing it. In addition, the Act specifically states that, regarding listed companies, the market value will be deemed to be the reasonable value unless otherwise evidenced.

3.3.    Insurance sector

The Act implements certain EU Directives, including some that affect the regulations in force in the insurance sector. Thus, several amendments are made to said regulations, in particular to the Private Insurance Regulatory Act (Ley de Ordenación y Supervisión de los Seguros Privados) and the Motor Vehicle Insurance Act (Ley sobre Responsabilidad Civil y Seguro en la Circulación de Vehículos a Motor). The most important changes are the following:

With regard to motor vehicle insurance, the Act creates the figure of a representative of the insurance companies and sets forth several provisions regarding (i) damages caused in other EU Member States when the vehicle is registered in Spain, or vice versa; and (ii) damages caused in non-EU Member States.

Measures regarding information exchange between the relevant national supervisory bodies for the sector are established.

The Act provides for the removal of the Insurance Companies Liquidation Commission (Comisión Liquidadora de Entidades Aseguradoras), which is the public body in charge of liquidating insurance companies under certain circumstances. The duties of this Commission are assumed by the existing Insurance Clearing Consortium (Consorcio de Compensación de Seguros). Additionally, in connection with this Consortium, the Act (i) redefines the losses to be indemnified by the Consortium in the event of extraordinary risks, including among them certain losses of earnings or income, and (ii) widens the range of classes for which a surcharge in favour of the Consortium is mandatory.

Finally, the definition of life insurance of the Insurance Contract Act (Ley del Contrato de Seguro) is modified.

3.4.    Savings banks

The Act has made significant amendments to the regulations applicable to savings banks, in particular regarding (i) their managing bodies; (ii) the share quotas (cuotas participativas); and (iii) the creation of alliances.

Regarding the managing bodies, the Act provides that (i) all their members shall meet several requirements of professional and commercial honesty; (ii) the public bodies and entities shall not appoint more than 50% of their members; (iii) the appointment of the members shall be irrevocable except in the event that they fail from time to time to meet the requirements demanded for their appointment, or any other justified reason (justa causa); and (iv) their members shall be appointed for a maximum period of six years and may be reappointed for a similar period, never exceeding a twelve year mandate. Finally, the Act provides that the members of the Board of Directors shall not be older than 70 at the time of their appointment except when otherwise provided in the regulations of the relevant Autonomous Regions.

As for the share quotas, they are a special type of security which can only be issued by savings banks and which do not carry voting rights. Share quotas were created in 1988 in order to allow savings banks to increase their equity capital. However, since 1988 there have been no issuances of share quotas by savings banks. In view of this fact, the Act provides a new basic regime for these securities in order to try to stimulate said issuances, referring further statutory development to the Government. The economic features of the share quotas make them resemble ordinary shares of companies other than savings banks. However, the holders of share quotas do not have voting rights in any of the savings banks’ managing bodies and may not otherwise participate in the management of said entities. Other characteristics of share quotas that we can highlight are that (i) they are perpetual; (ii) they may be listed in official markets; (iii) no single person or entity shall hold more than 5% of the share quotas of a savings bank; and (iv) the amount of share quotas issued by a savings bank shall not exceed 50% of the savings bank’s net value.

Finally, the Act expressly authorises savings banks to enter into alliances and/or cooperation agreements between themselves that shall be embodied by specific entities to which the boards of directors of the relevant savings banks may delegate several powers. Said alliances and/or agreements will be aimed at achieving cost reductions in the participating entities, increasing their efficiency or participating in international capital markets.

3.5.    Credit unions

The Act 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 Act 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, on aggregate, more than 50% of the share capital of the credit union.

3.6.    Guarantees granted in favour of EU central banks

The Act 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 provides in connection with the rights and obligations deriving from a future or current transaction between the relevant entity and any of the aforementioned central banks, that guarantees may be granted not only by means of creating a pledge or another kind of charge or encumbrance, but also by means of entering into any agreement concerning liquid assets, including money, for that purpose.

The granting of these guarantees will not require the intervention of a Notary Public. However, these guarantees need to be granted in writing and are 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 for amounts not exceeding the value of the collateral.

3.7.    Territorial bonds

The Act creates a new category of fixed income securities, the so-called territorial bonds (cédulas territoriales). These bonds may be issued by credit entities who have provided credit to (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 a similar nature within the Economic European Space. These bonds will be secured by the relevant credit of these entities and public bodies. The territorial bonds will be represented in book-entry form and may be listed in the securities markets.

3.8.    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) shall 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 concerning 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 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 (w) at least one of the parties thereto is a credit entity or an investment services company duly authorised under Spanish law; (x) the netting agreement sets forth a single obligation comprising all the related financial transactions; (y) pursuant to this obligation, in the event of early termination, the parties will only be entitled to claim the netting balance resulting therefrom; and (z) the netting agreement has not been carried out in fraud of creditors.

The Act extends the scope of the netting provisions. In this regard, the netting provisions will be applicable not only to derivatives (including an express reference to credit derivatives), but also to sell and buy back securities and simultaneous transactions (operaciones dobles o simultáneas) over any type of assets, sales with agreement to repurchase (repos), stocklending transactions, assignments as security, guarantees and other direct or indirect guarantee transactions related to the netting agreement.  In addition, the netting provisions will be applicable to derivatives transactions with public debt securities, negotiable securities or cash as underlying assets.  The enforcement of the netting agreement shall be made in accordance with the terms and conditions of such agreement.

3.9.    Securitisation

3.9.1.    Mortgage transfer certificates

The Act regulates the so-called "mortgage transfer certificates" (certificados de transmisión de hipoteca).  This term will now designate those mortgage participations (i.e. the most common mortgage securitization instrument) that do not meet all the requirements set forth by the Spanish mortgage market regulations and which could not be securitized by the local mortgage securitisation funds (fondos de titulización hipotecaria). The Act confirms an already existing market practice and allows mortgage loans and credits which do not comply with the above referred requirements to be securitized by issuing these "mortgage transfer certificates" and selling them to the local asset securitisation funds (fondos de titulización de activos).

3.9.2.    Assignment of credit with public bodies

To encourage and facilitate the assignment and securitisation of credit provided to public bodies, the Act sets forth that the assignment of such credit 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 met.

3.10.    Venture capital companies

The provisions applicable to venture capital companies (sociedades de capital riesgo) have been significantly amended by the Act.

The Act redefines the corporate purpose of venture capital companies. According to the new definition, said purpose is the acquisition and holding of temporary stakes in the share capital of non-financial entities which, at the time of the acquisition, are not listed in a stock exchange. Therefore, venture capital companies can maintain said holdings even after their target company is listed.

Secondly, the Act relaxes the incorporation requirements for venture capital companies by permitting certain 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.

Additionally, the Act sets forth that venture capital companies may hold investments in companies belonging to their group or to their managing companies' (sociedades gestoras) group, not exceeding, on aggregate, 25% of their assets, provided that said companies comply with certain transparency requirements.

Finally, the Act provides that the rules for the avoidance of double taxation contained in section 28.5 of the Companies Tax Act will apply to any gain or income arising from the transfer or redemption of the shares of a venture capital company. Said provision will also apply to the transfer or reimbursement of participations (participaciones) in venture capital funds (fondos de capital riesgo).

3.11.  Internet, related electronic means and e-money

With regard to agreements executed through the Internet or by other related electronic means, the Act must be put into context following the Information Society Services and E-commerce Act of 11 July, 2002 (Ley de Servicios de la Sociedad de la Información y de Comercio Electrónico). This act expressly recognises the validity of agreements executed through the Internet or other related electronic means (such as e-mail), which will be governed by its provisions and by any provision on the subject enacted by the Spanish Government.

The Act defines e-money as a monetary value which is (i) represented by a credit that may be claimed by the issuer; (ii) recorded by electronic means; (iii) issued for the receipt of funds whose value may not be under the monetary value issued; and (iv) accepted as a means of payment by companies other than the issuer.

In addition, the Act creates a classification for so-called e-money entities (entidades de dinero electrónico), the main purpose of which will be to issue e-money. This activity may be carried out exclusively by credit entities provided that a prior authorisation has been granted.

3.12.  Collective investment schemes

Several aspects of the provisions applicable to collective investment schemes (instituciones de inversión colectiva) and to their management and depository companies have been amended. In this regard, the Act (i) provides that the authorisation for the incorporation of collective investment schemes and their depositories shall be granted by the CNMV, while the Ministry of Economy shall only grant the authorisation for the managing companies (sociedades gestoras); (ii) provides that registration of investment funds (fondos de inversión) in the Commercial Registry is no longer mandatory; and (iii) sets forth the procedure for mergers between collective investment schemes, providing that their authorisation is now entrusted to the CNMV.

Additionally, other provisions have been enacted in several areas, such as (i) the bankruptcy of depository companies, and (ii) the applicable requirements for stocklending transactions executed by Collective Investment Institutions, which have been relaxed so as to cover transactions carried out over the counter.

3.13.  Risk Information Centre

The regime applicable to the Risk Information Centre (Central de Información de Riesgos) has been totally restated. Chapter VI of the Act enacts a complete set of provisions, redefining the purposes of the Risk Information Centre as (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 covered entities; and (iii) contributing to the proper exercise of its powers by the Bank of Spain.

The covered 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 the issue of securities, financial instruments and other financial agreements.

Finally, it must be noted that the new provisions affecting the Risk Information Centre supersede 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 shall not be included in the information registered with the Risk Information Centre. However, the registered information must be accurate and updated constantly and the individuals to which it refers are given access to it and the right to amend it if it is incorrect.