IFLR 7th EU Prospectus Rules Conference



27 September 2016, Le Meridien Piccadilly, London

Key takeways




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IFLR Coverage

Photos

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See below for a review of the topics discussed at the 7th EU Prospectus Rules Conference

Keynote address: A view from the European Commission on the Prospectus Regulation proposals and discussions 

  • Raptis said that the Commission wanted the regime to be implemented as rapidly as possible
  • She said that the Commission had received feedback from frequent issuers that needed some sort of self-registration to be able to react to market windows quicker, though stressed that the solution was not a straight replica of the US system
  • On risk factors, Raptis said that currently prospectuses are often overloaded with them and are not specific to the issuer and securities. “Potential investors don’t find risk factor sections in prospectuses useful since they cannot identify relevant risks”


Regulators’ feedback panel: How national regulatory authorities view the proposed changes to be brought in by the prospectus regulation and the impact of Brexit

  • Regulatory speakers discussed the challenges facing rule makers in creating a successful prospectus regime. One argued that ultimately the market will decide what constitutes proper disclosure and what needs to be included in prospectuses
  • The argument could be made that the focus has previously been too strongly on investor protection now it's a little too far on the CMU and access for issuers. “We need to get balance right,” said one regulator
  • They discussed the merits of a separate wholesale/retail disclosure regime. While the benefits were clear, criticisms of the distinction centred on the EC’s arguments over liquidity impact of a €100,000 denomination
  • All agreed on the challenges regarding risk factor disclosure. Many criticised issuers for inflexibility over the proposed rules which often insist that all risk factors are ‘material’ and all are equally important
  • Prospectus summaries were also discussed. One panellist said the summary should be maintained for retail investors but thought the summary regime in its current format doesn’t really work


An update from Esma on the prospectus regulation level 2 measures
(Ronan Dunne, senior officer, corporate finance, Esma)

  • Although some mandates are quite clear in relation to the current overhaul of EU prospectus rules, with all three institutions on the same page, Dunne said that from an Esma perspective it is very much wait and see at this stage in terms of who will hold the pen and what will be required.
  • Esma has divided its new Prospectus Directive (PD3) work into several areas: technical advice, mandatory and optional technical standards, level 3 guidance and IT planning and development.
  • Esma is looking at ways to streamline the disclosure requirements in the new regulation in order to simplify the regime from both an issuer and investor perspective.
  • Dunne stressed Esma’s increased focus on supervisory convergence in relation to the prospectus approval process, particularly in the context of the wider CMU initiative
  • While timing is ultimately a matter for the co-legislators, Esma expects that PD3 will become applicable in early 2019. This is on the assumption that the political trilogue will be completed by the end of this year and the regulation published in Q2 2017

 
The prospectus regulation - what are the key concerns for the industry?

  • While PD3 makes it easier for issuers to raise funds, the introduction of a unified disclosure regime for wholesale and retail buyers is not as straightforward. One panellist stressed institutional investors are “more sophisticated” and “don’t need as much hand holding” as retail investors
  • An alternative offered by the EU Parliament would be adapting the level of disclosure depending on what type of investor the offering is targeting – however, shifting the burden too much on issuers would not be beneficial to the market, one panellist warned
  • The EU Commission’s risk categorisation proposal is cumbersome and costly, and will likely increase liability concerns for issuers. The same goes for summaries. “It’s a kitchen sink version of prospectuses,” said one speaker
  • There is a tendency to want to address a lot of issues in the PD3 scope, but there are other regulations to consider too (Mifid or Priips for example)
  • In terms of the member state who exercises control over the ads’ compliance: it should be the responsibility of the regulator who has reviewed the prospectus, not the one where the information is disseminated. This could cause a fragmentation of responsibility


A view of the prospectus regulation from the stock exchanges of Ireland, the UK and Luxembourg

  • Overall the existing prospectus directive “hasn’t served the market badly”
  • The new regime has placed an overemphasis on the protection of retail – which some don’t agree should be addressed in this space – but some of it has been sensible
  • The distinction between wholesale and retail investors may be missing the point. It may be more about the type of product – while the company’s overall operations is relevant for equity products, it’s not the same for debt
  • It’s important to keep banks active in the capital markets so regulators should be mindful of additional costs
  • Liquidity issues in the wholesale market must be addressed before retail
  • There is a real risk that increased regulation will send issuers out of Europe altogether
  • It’s clear that issuers’ resistance to sell to retail should be addressed, but the proposed changes might not be the best medium to do so


A buy side view of the Prospectus Regulation proposals

  • The four main PD3 areas of concern for the institutional investors represented by the Investment Association are: the minimum issuance threshold, the secondary issue threshold, summaries for both equity and non-equity and risk factors
  • For the secondary issuance threshold, this is because there are vast loopholes to issuers available where they should be producing prospectuses
  • The association questions whether the regulation should specify the length and specific content of the prospectus
  • If wholesale investors find the documents challenging, it’s hard to see the benefit to less sophisticated retail investors
  • Investors have different needs so wholesale standardisation isn’t necessarily the right option
  • There’s a perception of a higher standard on regulated markets in terms of governance


The challenges of a parallel disclosure regime – how will issuers and investors deal with an issue specific summary and a Priips Key Information Document?

  • There are some similarities between a Priips KID and a prospectus under the new regulation, but none that are meaningful
  • Parliament’s rejection of the regulatory technical standards for Priips means the next move is anyone’s guess – whether only level 1 will be implemented, or if the market is to wait for the standards and delay implementation
  • It’s generally accepted a KID isn’t much use to the average investor alone – it should be read referenced to a like document
  • If you make a Priip available to retail investors you must include a KID, which only the manufacturer of the Priip can produce – so relationships with manufacturers will have to change
  • A KID has to be automatically updated and constantly available – a huge undertaking in terms of the technology required
  • These aren’t legal documents as anyone knows them, but highly complex and detailed structuring documents
  • There is some inconsistency between the Priips regulation and Mifid II that needs to be resolved


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