Bank of Italy struggles to protect retail investors

Author: | Published: 24 May 2005
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Pursuant to Article 129 of Legislative Decree 385, September 1 1993 (the Single Banking Act), offers into Italy of so-called standard securities exceeding a given value, and any offers into Italy of non-standard securities, must be notified to the Bank of Italy between 20 and 30 calendar days before the offer (an Article 129 notification). If the Bank of Italy raises no objections within the following 20 days, the transaction can be executed (an ordinary notification, comunicazione ordinaria). The notification is made (on a set form) by the issuer, the offeror or a third party appointed by either of them, and must provide a detailed description of the relevant securities and a timetable of the transaction.

The current provisions of Article 129 are the result of integration of different rules originally provided by a set of laws that had different purposes (the first was the banking law dated 1936). When in 1993 the Single Banking Act (subsequently amended in 1996) was issued, the integration of the previous rules created Article 129, which aimed to protect the stability of the Italian financial market. At the same time, what was a system based on authorization was transformed in a system of prior notification to the Bank of Italy, whereby the notified transaction is deemed cleared unless the Bank of Italy raises objections during the 20 days after the notification.

As mentioned above, the purpose of Article 129 notification is to provide the Bank of Italy with the power to guarantee the stable, correct and orderly functioning of the domestic financial markets. This purpose is confirmed by the fact that, in theory, the Bank of Italy's powers to prohibit or postpone an offer are limited. Generally, such powers can be used by the authority if the securities to be offered: (i) in light of their size or specific features, may hinder the correct functioning of the domestic financial markets; (ii) if the relevant terms are not consistent with the provisions of Italian law regulating such instruments or are not transparent and easy to understand or, if the securities are linked to indices, they are not calculated on the basis of objective methods; and (iii) in the case of foreign securities, if the Bank of Italy is not satisfied that the issuer or the guarantor of the securities is subject to supervision and controls comparable to those exercised in Italy.

However, it seems that Article 129 notification is gradually becoming an instrument for the protection of Italian retail investors. To understand this development, the overall picture of the Italian provisions applicable to offers of securities into Italy since the enactment of the Single Banking Act needs to be considered.

Article 129 is only one of the two main pillars of the Italian provisions on offering securities: the other one is the investment solicitation regime set out by Legislative Decree 58, February 24 1998 (the Single Financial Act). Pursuant to the provisions of the Single Financial Act, offers of financial products to the public in Italy are subject to prior clearance by Consob (the Italian stock markets regulator). The offeror must produce and publish a prospectus in Italy and comply with certain investment solicitation rules. Several exemptions are available and one of the most important is the exemption from Consob's clearance if the offer is only addressed to professional investors (as defined under Consob Regulation 11522, July 1 1998, as amended). If the offer of financial products is addressed to professional investors in Italy, no prospectus has to be filed with Consob. The same exemption does not apply to an Article 129 notification. Even if the offer of the relevant securities is only addressed to professional investors, if the securities (or part of the same) are offered in Italy, a notification should be filed in advance with the Bank of Italy.

Eurobond marketing

Due to the professional investors exemption, most of the offers carried out in Italy have been made without previous clearance by Consob. The typical marketing structure for the offer of securities in the Euromarkets is such that the lead manager (or the managers) of the offer subscribe the securities and sell them, on the basis of an English offering document, only to professional investors in Italy, who in turn generally on-sell the bonds to their retail clients in the context of their standard trading activities. In practice, this marketing structure has made it possible to sell securities to retail investors in Italy without having to comply with the prospectus requirements.

Both the Bank of Italy and Consob have been aware of this marketing structure, and the Bank of Italy has tried to use its tools (that is, Article 129 notification) to scan the securities placed in the Italian markets and to protect, to some extent, Italian retail investors.

The Bank of Italy's approach

A few years ago, when the issuer was a bank (regardless of the place of incorporation of the bank), the Bank of Italy started requiring the filing of a so-called foglio informativo (that is, a document, in Italian only, detailing information about the offer, the issuer, the offeror, the product, and the risks related with the investment in the product), taking an approach that could be said to go beyond what is strictly mandated under the applicable regulations.

In fact, the duty to draft the foglio informativo is provided by the Italian transparency rules applicable to banks and should, in theory, only be complied with by the bank/issuer when the relevant securities are offered to retail investors. But, the Bank of Italy, in the light of the risk that the securities ended up in the hands of retail investors (even if the Article 129 notification duly filed by the issuer/offeror stated that the offer was addressed to professional investors), has adopted this approach. The foglio informativo, which should be drafted pursuant to a specific scheme, provides a minimum level of information (in particular on the risks of the investment in the securities) to retail investors in Italian.

At the same time, the Bank of Italy has also tried to avoid certain securities being on-sold to retail investors in Italy. In particular, regarding securities the Bank of Italy considered not suitable for retail investors, the Italian authority started requesting, in connection with the filing of an Article 129 notification, insertion into the relevant offering document of Italian selling restrictions whereby it was expressly set out that the securities where not to be offered to retail investors in Italy (in the primary and in the secondary market).

In certain circumstances the Bank of Italy has conditioned the approval of offers of securities into Italy on the adoption of a particularly high minimum denomination (for example, €100,000 ($119,047)). This approach, even if questionable, has made on-sale of the relevant securities to retail investors in Italy difficult.

In addition, since November 2003 the Bank of Italy started treating the issuance of bonds into Italy by banks as a core banking activity. So the Italian authority has since then required that foreign banks issuing bonds into Italy be duly licensed to provide banking services in Italy (that is, that EU banks are passported and non-EU banks are authorized to carry out banking activity into Italy on a cross-border basis).

In practice, the approach taken so far by the Bank of Italy seems to have changed the Article 129 notification procedure into a de facto authorization proceeding, where the Bank of Italy has a wide power to prohibit or postpone an offer.

Unfortunately, the steps made by the Bank of Italy have not constrained the negative consequences of the defaults of certain Italian companies (for example, Cirio and Parmalat), which have largely used the issue of bonds in the Euromarket, and first of all in the Italian market, to raise capital. Even if the defaults of Cirio and Parmalat bonds seem to be due, in large part, to fraud and criminal conducts, the Italian public has strongly criticized the Italian authorities and the low level of protection offered to retail investors by the Italian regulatory framework.

What future for Article 129 notification?

In light of the above, on February 3 2004 the Italian government approved a draft bill aimed at introducing new provisions for the protection of retail investors in connection with offering securities in Italy.

In general terms, the Bill provides for, among others: (i) the strengthening of Consob's powers; (ii) Consob's transformation into a new authority, to be called Autorità per la tutela del risparmio; (iii) the transfer to this authority of some of the duties and powers previously performed by the Bank of Italy in order to increase the protection of retail investors (for example, Article 129 notification); (iv) in the case of circulation of financial products, issued abroad and originally placed only to professional investors, where the same circulation takes place in Italy in the context of carrying out investment services, the Bill says that the relevant intermediary is responsible for the solvency of the issuer vis-à-vis the retail purchasers; and (v) the abrogation of the exemption for banks from the public offering rules provided by Article 100(f) of the Single Financial Act.

The Bill has been submitted to Italian parliament for approval. It is difficult to foresee when the Bill will be approved by parliament, thus acquiring force of law in Italy. Parliament has the power to amend the draft bills submitted to it by the government. Due to the sensitive subject matter and the different views already taken by political parties and market players on the main issues rising from the Bill itself (in particular with regard to point (iv) above), it is likely that the approval process will take a few months and that several significant amendments to the original text will be made.

However, it is the hope of all the parties involved in the discussion (market players, advisers and political parties) that the Bill will be approved soon and that the purpose of Article 129 notification, and the related power of the relevant authority dealing with the notification, will be more clearly stated. Considering that the power to deal with Article 129 notification is due to pass to Consob as the new Autorità per la tutela del risparmio, it cannot be excluded that Consob (with its new role and powers) may reconsider the approach recently adopted by the Bank of Italy.