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Securities flagging rules to be amended

In December 1997, the Ministry of Finance released its draft for a government bill on flagging rules. The draft proposal included, among other things, amendments to the thresholds triggering the flagging obligation.

According to the proposal, a shareholder whose holding in a limited liability company reaches, exceeds or falls below 2%, 5%,10%, 20%, 33.33%, 50% or 66.67% of the voting rights or of the share capital in the target company, is obliged to disclose his or her holding to the target company and to the Finnish Financial Supervision. Because the minimum threshold is now 10%, the amendment would lower the threshold for disclosure obligation considerably.

The Proposal aimed to ensure equal treatment of Finnish and foreign investors. At the moment, the holdings of Finnish investors are publicized by the target company's share register, regardless of the amount of the holding. Foreign investors, on the other hand, are able to hold shares in listed Finnish companies anonymously up to the 10% level, due to the possibility of nominee registration. The amendment would lower the limit on anonymous ownership to 2%.

According to the proposed amendment, the disclosure obligation would apply to all shareholders of listed Finnish target companies, irrespective of whether the shares are subject to public trade in Finland or abroad. At the moment, the flagging obligation applies only to shareholders in Finnish companies whose shares are subject to public trade either in Finland or in the EEA. According to the proposal, the flagging obligation would be extended to shareholders in companies in respect of which an application for listing has been filed.

The flagging obligation may be triggered not only by a share purchase but, for example, by derivatives agreements or repurchase agreements. According to the Securities Market Act, the change in holding (provided one of the relevant thresholds is reached, exceeded or fallen below) is disclosed the day the agreement is concluded, at the latest. The share capital or voting rights obtained are not necessarily known on the same day. According to the proposal, therefore, the holding may be disclosed even on a later date, the moment the shareholder finds out, or should find out, the exact holding.

Not only would holdings in listed companies be subject to the flagging obligation, but also holdings in essential market participants (stock exchange, options entity, credit institution, investment firm) would have to be disclosed, even if the entity is not listed. The purpose of the proposal is to increase investors' confidence in the market and to improve the supervision by the competent authorities of market parties.

The proposed stricter flagging thresholds would enable the Financial Supervision to grant an exemption from the flagging obligation to a securities intermediary if the securities intermediary does not intend to influence the management of the target company.

The proposed stricter flagging thresholds of 2% and 5% have been criticized, especially the 2% threshold when the average minimum flagging threshold is about 5% in the EU and US.

A government bill on clearing issued

The Ministry of Finance issued a government bill on the clearing of securities trades, to amend the Securities Market Act, which already contains provisions on basic functions of the securities market. The clearing of securities trades is not yet governed on a legislative level, except for trades in standardized options and futures. The new provisions would be applicable to securities in traditional paper form, as well as securities entered into the book-entry system.

The professional and regular offering of clearing services would, under the proposal, require a licence. A licence would be granted only to a limited liability company specializing in clearing services. The Securities Market Act would include general provisions regarding, for example, the safety and reliability of the services provided, as well as the liabilities and obligations of the parties involved. In addition, the activities of a clearing entity would be governed by more detailed self-regulation. The rules will be confirmed by the competent authority.

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