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Belgium

New rules for reverse convertible or exchangeable notes (II)KPMG Legal Advisers, Brussels

The August issue of IFLR discussed the circular of June 19 2000 from the Belgian Banking and Finance Commission (BFC), regarding the approval procedure for prospectuses on the public issue of reverse convertible or exchangeable notes.

To recapitulate, this circular demands each issuer of reverse convertibles to insert a standardized text in each prospectus, drawing potential investors' attention to the risks of this kind of investment.

The risk can be found in the reverse convertible note's aleatory character. Unlike a bond, a reverse convertible is defined as a "random" debt instrument: the issuer may, at its choice, repay the investor the nominal amount of the note or, if the value of the underlying asset has negatively evolved, the underlying asset itself or its economical counter value.

This legal characterization of the reverse convertible note, which is fundamentally different from that of a bond, led the BFC to send a letter to the principal issuers of reverse convertibles and other parties concerned, on October 20 2000, recommending them to avoid using the terms "bond" (obligatie/obligation) and "bond holder" (obligatiehouder/obligataire) in prospectuses and publications destined to attract new investors.

The issuers and their intermediaries are urged only to use references to debt (schuldbewijzen/titres de créance) and creditors (schuldeiser/porteur) in these documents. This letter is understood to be a fine-tuning of the circular.

Patrick Verraes

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