30 December 2011
The London Stock Exchange’s ORB: Materials from the Retail Bond Issuance Forum
In this February 2011 post we summarised the key features of the London Stock Exchange’s Order book for Retail Bonds (ORB), which in the words of the Exchange “provides corporate debt issuers with direct access to retail investors through a cost effective and transparent electronic market”. This first serious attempt to launch a UK retail bond market has seen some success in 2011, with eight companies raising £1.22 billion.
In November 2011 the Exchange and Evolution Securities held a Retail Bond Issuance Forum, to encourage interest from corporate issuers in having their debt traded on the ORB. A comprehensive presentation by Evolution Securities on the UK Retail Bond Market can be accessed here, and the Exchange’s own overview of the ORB is here.
Key themes from the Retail Bond Issuance Forum
Two of the themes that emerged from this Retail Bond Issuance Forum were the appetite of retail investors for bonds issued not just by companies but also by universities, charities and housing associations; and that issuers were not put off by having to produce a retail prospectus. The other key themes of the Forum are summarised in a note on the Exchange’s website, as follows:
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29 December 2011
House of Commons inquiry adds to renewed European activity to address the “weaknesses” of credit rating agencies
From the start of the financial crisis the private credit rating agencies (CRAs) – principally, Standard & Poor’s, Moody’s and Fitch - have been the focus of political and regulatory attention, for two principal reasons. First, their consistent failure to identify the true nature of financial products that securitised sub-prime debt. Secondly, because of the impact that their downgrades of private and sovereign debt have on the issuers of that debt and more general market confidence. There is a useful short summary of the criticisms made of CRAs here and a summary of their confused activities in relation to Greece here.
The European Commission was quick to regulate CRAs with a directly applicable Regulation in 2009, subsequently amended in 2010. The growing European sovereign debt crisis in 2011 and the concomitant downgrades and threatened downgrades of the debt of various EU member states by the CRAs has now resulted in renewed regulatory attention by the Commission, with a draft Directive and draft Regulation being proposed in November 2011 – see the press release here and the FAQs here. The Commission’s page on CRAs is here.
The UK has been less concerned to regulate the activity of CRAs – until now.
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28 December 2011
Anthropologist Joris Luyendijk gets City workers to talk about their life, their ups and downs and what an average working day looks like
Since September 2011 the Guardian has been running a blog, “Voices of finance”, on which bankers and professionals in the Square Mile speak about their typical working day for anthropologist Joris Luyendijk. Here is an M&A lawyer (with an insanely dull “war story” at the start) and here is a competition lawyer.
Amongst the more interesting monologues is this female head of marketing (“try not to make men look stupid”) and this “banker’s ex-girlfriend“; this salesman for a brokerage firm, and this venture capitalist . (Updated) The saddest is this banker’s wife.
The Guardian’s Voices of Finance blog is ongoing.
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23 December 2011
Bloomberg article on the challenges facing the City’s stockbrokers as their business model faces decreased corporate activity, overcapacity, intense competition and technological change
One of the features of 2011 was the consolidation, and closure, of many London stockbroking businesses. Faced with fixed costs, fewer IPOs, a lower volume of shares traded and the need to invest in electronic trading platforms, some stockbrokers have closed their doors; others have sought mergers or parents with stronger balance sheets. This Bloomberg article provides a good overview of what 2011 meant for UK stockbrokers; this prediction by Deloitte of a better 2012 on the AIM market provides perhaps a glimmer of hope for the small stockbroker sector.
See also: Seymour Pierce receives record fine.
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22 December 2011
New York Times Dealbook article on the benefits of incorporating abroad in an age of globalisation
This article from the NYT Dealbook is a useful overview of the advantages of incorporating outside the US for companies that in fact conduct the majority of their business in the US. The analysis focuses on the recently-floated Michael Kors Holdings, which derives 95% of its revenue in North America, but which is incorporated in the British Virgin Islands, thus sidestepping “higher taxes and substantial regulation in the United States”, with its corporate headquarters in Hong Kong.
The articles also highlights that:
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21 December 2011
London Stock Exchange fines leading broker Seymour Pierce £400,000 for breaches of the Nomad Rules
Seymour Pierce, which acts as Nomad for more AIM companies than any other broker, has today been fined £400,000 for breaches of the AIM Rules for Nominated Advisers. This is the largest ever fine imposed on a Nomad. As summarised in the London Stock Exchange’s press release:
“The London Stock Exchange found Seymour Pierce had failed to meet the standards required of a Nomad in two key areas:
· Seymour Pierce did not provide proper advice and guidance to an AIM company in respect of its obligations to make announcements without delay, specifically relating to its changing financial situation and liabilities; and
· Seymour Pierce did not satisfy its obligation to the London Stock Exchange to undertake adequate due diligence and to properly assess the appropriateness of a company seeking admission to AIM.”
The two matters described above are separate and relate to Seymour Pierce’s interactions with two different companies, one already on AIM and one that was aspiring to join AIM. Here is the full Public Censure and Fine notice.
£200,000 of the £400,000 fine is payable immediately and £200,000 ”will be payable in the event that Seymour Pierce’s performance falls materially below the standard required of it as a Nomad within the next 24 months”.
The largest fine handed out to a Nomad before this was the £250,000 penalty imposed on Nabarro Wells in 2007.
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20 December 2011
BBA guidance is useful for all financial institutions and larger companies; contains suggestions on how to conduct due diligence on “associated persons” and on managing corporate hospitality
The British Bankers’ Association (the BBA) has today published its guidance on compliance with the Bribery Act 2010 (the Act). The guidance – which can be downloaded here – is expressed to be “primarily intended to support banks in considering how to approach the establishment of adequate policies and procedures” in relation to the Act. However, much of the contents of the guidance is not specific to banks and will be of interest to all larger regulated firms and also to many companies outside the financial sector. The guidance is dividend into six chapters:
- The Act – an overview.
- Comparison between the Act and the US Foreign Corrupt Practices Act.
- The Ministry of Justice’s “six Principles” on establishing the “adequate procedures” defence to the Act’s section 7 offence of failure of commercial organisations to prevent bribery.
- BBA guidance: Principles 2 – 6. This is the substantive part of the guidance, setting out the BBA’s views on how the Principles can be addressed and implemented.
- Additional guidance – Gifts, corporate hospitality and promotional expenditure.
- Additional guidance – Incident management and reporting
The guidance points out that regulated firms such as banks also have, in addition to observing the Act, regulatory obligations under
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19 December 2011
FRC review of how the UK Corporate Governance Code and the UK Stewardship Code are being implemented
The Financial Reporting Council published its first analysis of the “Impact and Implementation of the UK Corporate Governance and Stewardship Codes” on 14 December 2011. The analysis shows:
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19 December 2011
Disclosure and communication by private equity firms and their portfolio companies
The Guidelines Monitoring Group (the GMG) has produced its fourth report (the Report), summarising the private equity industry’s conformity with the Guidelines for Disclosure and Transparency in Private Equity (the Guidelines). The Guidelines were introduced following Sir David Walker’s review in November 2007 of the adequacy of disclosure and transparency in private equity.
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19 December 2011
Formalising the retail cascade exemption, and extending the exemptions 
for securities offered to employees
In November 2010 the European Parliament and Council adopted the Amending Directive (the AD (Directive 2010/73/EU)), which revises the Prospectus Directive and the Transparency Directive. Member States have until 1 July 2012 to implement the AD into national law. On 13 December 2011 HM Treasury and the Financial Services Authority published a joint consultation paper (CP (CP11/28)) setting out how they propose to implement the AD in the UK.
The purpose of the AD is, in the words of the CP:
“to increase legal clarity and the overall efficiency of the prospectus framework, as well as an opportunity to simplify the regime for the benefit of issuers, without compromising investor protection.”
The AD also makes changes to the Prospectus and Transparency Directive to ensure that issuers are not required to duplicate their disclosures under the two regimes and to ensure the two regimes are aligned.
Two of the measures contained in the AD have already been implemented into UK law, as we discussed in this post. Those changes increased, from 1 July 2011:
- The number of investors to whom an offer of securities may be made before a prospectus is required, from 100 to 150 investors; and
- The total size of the offer that may be made before a prospectus is required, from €2.5 million to €5 million.
The CP summarises the key changes that have been made to the Prospectus Directive:
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19 December 2011
Changes to the Fourth Company Law Directive pave way for UK Government to develop a new reporting regime for the smallest companies
UPDATE 24 March 2012: Following the EU’s adoption of the Directive on micro-entity reporting in February 2012, the Government has now announced that it intends to take advantage of the new EU regime and will consult on implementation in due course. See this post for details.
The European Parliament on 13 December 2011 agreed its position on a draft directive on the accounting and financial reporting requirements of very small companies – what are now referred to as “micro entities”. The effect is to create a new reporting regime better suited to micro entities than that set out in the 1978 Fourth Company Law Directive and the 1983 Seventh Company Law Directive (and in turn reflected in the UK Companies Acts), which is considered too demanding for the very smallest companies.
A set of FAQs on the draft directive is here and a press release is here.
The draft directive is expected to come into force in early 2012. The result will be that the UK Government will be able to proceed – should it decide to – with its proposal to develop a reporting regime for the smallest companies. That proposal was set out in a joint Department of Business, Innovation and Skills and Financial Reporting Council discussion paper titled “Simpler Reporting for the Smallest Businesses” in August 2011, which we discussed in this post.
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18 December 2011
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16 December 2011
For use by publicly-traded companies and revised to reflect recent changes to the UK Corporate Governance Code and related guidance
The Institute of Chartered Secretaries and Administrators has produced an updated version of its sample non-executive director’s appointment letter. Reflecting the latest (May 2010) edition of the UK Corporate Governance Code and associated guidance, including the FRC’s Guidance on Board Effectiveness (see this post), the accompanying ICSA press release explains that:
“Various sections…have been expanded, notably the areas relating to appointment, time commitment and the duties. There is a new clause on training, and a number of new standard clauses, commonly found in this type of appointment letter.”
The letter can be accessed on the ICSA website.
ICSA’s introduction to the letter states that it “is not intended to be a prescriptive template. It reflects the various practices of some of the larger companies and aims to provide an initial checklist of the elements a company may wish cover in its appointment letters. The text and content should be adopted to suit the company’s own circumstances.”
The letter is designed for use by listed companies that are required to “comply or explain” with the UK Corporate Governance Code by virtue of the Listing Rules, but will also be useful for AIM companies and for larger private companies.
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15 December 2011
Latest BIS growth agenda initiative will examine structural and behavioural barriers to raising non-bank finance
UPDATE 16 March 2012: The Taskforce has now published its report, which we discuss in this post.
The Department of Business, Innovation and Skills yesterday announced the formation of an “industry-led Taskforce…that will examine the challenges facing business in diversifying their finance”. The context of this exercise is the difficulties that small and medium-sized businesses report in obtain bank lending, and its implicit aim is to promote different methods of non-bank lending. BIS’s press release states that the Taskforce’s focus will be:
“on debt and credit products, looking at a range of finance choices, old and new, from corporate bonds to ‘crowd-funding’”.
The reference to corporate bonds is to the recent increase in:
- private placements of debt by unlisted companies in the UK, often offered to their own customers (see this recent effort by Caxton FX); and
- the ORB debt market operated by the London Stock Exchange, which we discuss in this post.
“Crowdfunding” is a generic term applied to lending aggregated from a group of individuals or non-bank corporate lenders to private companies (disintermediating the banking sector in the process), of which the leading example in the UK is Funding Circle.
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15 December 2011
Indictment of six former Siemens executives originated with an internal FCPA investigation by Siemens that also resulted in Siemens paying fines of $448 million
Uriel Sharef has become the first former board member of a Fortune Global 50 company to be charged under the US Foreign Corrupt Practices Act. Mr Sharef and five other former Siemens executives, and two of their agents, have been charged by the US Department of Justice for “allegedly engaging in a decade-long scheme to bribe senior Argentine government officials to secure, implement and enforce a $1 billion contract with the Argentine government”. The details of the indictment and of the $100 million that was allegedly committed to be paid in bribes (including by physically carrying $10 million into a Swiss bank) are set out in this DoJ press release.
The most interesting aspect of this case from a compliance and governance perspective is that the indictments are the ultimate result of an investigation by Siemens itself which has resulted in a “complete restructuring” of Siemens, as described in the DoJ press release:
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14 December 2011
Change follows concerns over illiquidity and corporate governance in UK-incorporated foreign companies listed on London
We reported in this post on 2 November 2011 on the reasons for the FTSE Group’s market consultation on its minimum free float requirement for the FTSE UK Index Series. Inclusion in that Series makes it much more likely that index-tracking funds will have to invest in a company’s shares – which, given a choice, they may not wish to do if the vast majority of the shares are tightly-held by founders, oligarchs or foreign governments. A tightly-held company may give rise to concerns about illiquidity in the traded shares or about poor corporate governance.
The FTSE Group announced the results of its consultation today. It is moving to a minimum free float requirement of 25% (from 15%).
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12 December 2011
The “due diligence conducted in relation to the ABN AMRO acquisition was insufficient and inadequate in relation to the risks involved”
The Financial Services Authority has today published its report into the failure of Royal Bank of Scotland. One of the principal causes of the collapse of RBS was its acquisition of ABN AMRO, which the FSA concludes was conducted “without appropriate heed to the risks involved and with inadequate due diligence”. The FSA press release is here and the full report can be read here.
However, the FSA has decided to take no action with regard to that due diligence failure, for the following reasons (at section 2.3 of Part 3 of the report, at paragraph 247):
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9 December 2011
Paper on “Leadership in a global economy” adds to the debate about the health of the IPO markets
Recent weeks have seen various reports and initiatives on what can be done about the decline in the number of IPOs in the UK and the United States, which we’ve reflected in a number of posts including:
The London Stock Exchange Group (LSEG) has now added to this debate with a paper on “The future of London’s IPO market”, which the LSEG describes as providing a “straightforward and unbiased analysis of the realities of the London listing environment” and contains “a series of recommendations for ensuring the continuation of London as the pre-eminent home for UK and international IPOs”.
The LSEG’s accompanying press release sets out those recommendations:
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9 December 2011
UK’s wider definition of market abuse will now last until 31 December 2014
HM Treasury confirmed yesterday that sub-sections (4) and (8) of section 118 of the Financial Services and Markets Act 2000 will now expire on 31 December 2014 and not at the end of 2011. The statutory instrument to effect this extension is here and the accompanying explanatory memorandum is here.
Sub-sections (4) and (8) reflect the scope of the UK’s market abuse regime before the Market Abuse Directive (MAD) was implemented. When the MAD came into force, it was decided to retain these sub-sections but make them subject to sunset clauses dependent on a review of whether they remained justified.
These two sub-sections make the UK market abuse regime wider than that required under the Market Abuse Directive. The reasons for the wider UK regime are summarised in the Treasury’s impact assessment:
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8 December 2011
Plan would create a “European Venture Capital Fund” designation and a single rulebook for marketing of VC funds across the EU
In June 2011 we reported on the European Commission’s consultation on the need for an EU-wide “passport” for venture capital funds. Yesterday the Commission published its proposed regulation that would create this passport and summarised it in its press release as follows:
“The new regulation will make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups. The approach is simple: once a set of requirements is met, all qualifying fund managers can raise capital under the designation “European Venture Capital Fund” (EVCF) across the EU. No longer will they have to meet complicated requirements which are different in every Member State. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger.”
As the Commission observes in its frequently asked questions document on the proposed regulation, at the moment:
“there are no specific EU level rules that facilitate fund-raising by venture capital fund managers. Venture capital is much more developed in some countries than in others but only nine Member States have put in place dedicated rules for venture capital. The remaining 18 countries apply general rules on company or corporate law to venture capital funds. As a result, there is limited cross-border fundraising activity of European venture capital funds. On average, the proportion of cross-border fundraising for all types of venture capital funds has for the last four years reached only 12% (€ 2.5 billion)”.
The EVCF passport
The European Venture Capital Fund passport would be available for venture capital funds that:
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7 December 2011
Must have been a very fast deterioration in the company’s markets
On 17 and 18 November 2011 Stephen Puckett, an executive director of Michael Page International plc, and his wife sold 594,672 shares in Michael Page, at prices between £3.76 and £3.30, raising £2,249,889.
On 15 and 16 November 2011 Charles-Henri Dumon, an executive director of Michael Page, sold 130,000 shares in Michael Page, at prices between £3.65 and £3.69, raising £475,700.
On 5 December 2011 Michael Page issued a profit warning, resulting in a share price drop to around £3.16.
The Model Code annexed to Chapter 9 of the Listing Rules:
“imposes restrictions on dealing in the securities of a listed company beyond those imposed by law. Its purpose is to ensure that persons discharging managerial responsibilities do not abuse, and do not place themselves under suspicion of abusing, inside information that they may be thought to have, especially in periods leading up to an announcement of the company’s results”
and prohibits dealing in a company’s shares in “any period when there exists any matter which constitutes inside information in relation to the company”.
Michael Page’s profit warning on 5 December 2011 was unscheduled and so the inference to be drawn from the short period of time (less than three weeks) between the timing of the executive directors’ share sales and the date of the profit warning is that Michael Page’s markets deteriorated so rapidly that the executive directors were not in possession of any inside information at the time of those share sales.
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6 December 2011
HM Treasury sets out draft SEIS legislation in the Finance Act 2012
We reported last week on the Chancellor’s announcement in his Autumn Statement of a new tax-advantaged scheme to encourage investment in start-up business, to be called the “Seed Enterprise Investment Scheme” (the SEIS). HM Treasury has today published the draft Finance Bill 2012 containing details of the SEIS and its operation. The SEIS will, in the Treasury’s description:
“- apply to smaller companies, those with 25 or fewer employees and assets of up to £200,000, which are carrying on or preparing to carry on a new business;
- give income tax relief worth 50 per cent of the amount invested to individual investors with a stake of less than 30 per cent in such companies, including directors who invest in their companies;
- apply to subscriptions for shares, using the same definition of eligible shares as EIS (which it is proposed will be widened in Finance Bill 2012);
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5 December 2011
The Reopening American Capital Markets to Emerging Growth Companies Act of 2011 – the Schumer-Toomey bill
The decline in the number of smaller company IPOs has been the subject of recent analysis and debate in the United States and, to a lesser extent, in the United Kingdom. See, for example, our post of November 2011 on ”Encouraging companies to float: Report of the U.S. IPO taskforce” and our posts on recent reports from Grant Thornton and PwC. Now a bill has been introduced to the U.S. Senate which is designed to make it easier for smaller companies to go public.
The “Reopening American Capital Markets to Emerging Growth Companies Act of 2011″, or more handily the Schumer-Toomey bill (after the two leading senators who are sponsoring it) is a bipartisan bill that aims to create a transitional “on ramp” status for companies that are going public. In essence, a period in which recently-floated companies do not need to comply with the full range of U.S. securities laws. As summarised on Senator Toomey’s website, the bill would:
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5 December 2011
Largest ever retail fine for HSBC for mis-selling products to elderly customers
Just when it appears the banks couldn’t do any worse…The Financial Services Authority’s press release and Final Notice sets out why it has fined HSBC for mis-selling investment bonds to elderly people with an average age of 83 who were ”entering, or already in, long-term care…typically these investments are recommended for a minimum period of five years”:
“The Financial Services Authority (FSA) has issued its largest ever retail fine of £10.5 million to HSBC because of inappropriate investment advice provided by one of its subsidiaries, NHFA Limited (NHFA) to elderly customers. HSBC estimates that the amount of compensation to be paid to NHFA customers will be approximately £29.3 million in addition to the fine.
Between 2005 and 2010 NHFA advised 2,485 customers to invest in asset-backed investment products, typically investment bonds, to fund long-term care costs for elderly customers. The products were sold to individuals entering, or already in, long-term care and in many cases these elderly customers were reliant on the investments to pay for their care. Typically these investments are recommended for a minimum period of five years.
The advice and sales were unsuitable because in a number of cases the individual’s life expectancy was below the recommended five-year investment period.
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2 December 2011
Grant Thornton report asks, “Are London’s equity markets failing the small cap sector?”
We have been reporting recently on the issues facing the smaller listed company market. See this post on concerns about the decline in smaller company IPOs, and this post on PwC’s survey of AIM company sentiment. Hard on the heels of that PwC survey comes this Grant Thornton report, “Back to basics for equity markets: Are London’s equity markets failing the small cap sector?”. The Grant Thornton report contains a short discussion of:
- Structural reasons for neglect of the small cap market; and
- The decline in the support system for smaller listed companies
as well as advice to smaller companies from institutional investors on how to engage better with the investor community.
Structural problems in the market, and a weakening support system
The Grant Thornton report identifies these structural problems in the small cap market:
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1 December 2011
Wide-ranging changes suggested to the structure of the statutory audit market and the business model of the Big Four
The European Commission published its proposals for reform of the audit market on 30 November 2011. These proposals, if enacted in their current form, would entail major changes to the business models of the Big Four auditors, to the work of the audit committees of large listed and regulated companies, and to the regulation of the audit market in the EU. To implement its proposals, the Commission has put forward a draft Directive to amend Directive 2006/43/EC (the Statutory Audit Directive) and a new Regulation on specific requirements for the statutory audit of public-interest entities. The Commission’s press release is here and its useful FAQs are here.
The impetus behind the proposals is the perceived failure of auditors to identify problems in their audits of those financial institutions that had to be rescued by government bail-out in the early stages of the financial crisis. In the words of the Commission’s proposed Regulation:
“Given that many banks revealed huge losses from 2007 to 2009 on the positions they had held both on and off balance sheet, it is difficult for many citizens and investors to understand how auditors could give clean audit reports to their clients (in particular banks) for those periods.”
The Commission’s proposals
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1 December 2011
Invesco let off by the Takeover Panel after accidentally acquiring more than 30% of the voting rights in Chemring Group plc
A fundamental tenet of takeover regulation in the UK is that once a person acquires an interest in shares which carry 30% or more of the voting rights in a company, that person must make an offer for all of the equity share capital of that company. This is the “mandatory offer requirement” contained in Rule 9 of the Takeover Code.
How easy it can be accidentally to stray into Rule 9 mandatory offer territory is illustrated by yesterday’s announcement from Chemring Group plc that Invesco’s holding in Chemring exceeded 30% on 25 November 2011 ”as a result of a purchase coinciding with a share buyback”. I.e., Chemring’s buyback of its own shares, together with Invesco’s purchase in the market, meant that Invesco’s holding went over 30% – and so theoretically triggered the requirement for Invesco to make a mandatory offer.
Fortunately for Invesco, the Panel let them off – as it has discretion to do. From Chemring’s announcement of 30 November 2011:
“This was an inadvertent mistake. Following discussions, the Takeover Panel has confirmed that no mandatory bid under Rule 9 of the Takeover Code for Chemring Group plc is required by Invesco Ltd. Invesco Ltd has taken immediate steps to correct the position by effecting a sale of shares such that its holding in Chemring Group plc decreases to below 30%.”
The problem was already apparent to the market, as on 29 November 2011 this TR-1 (Notificaton of major interest in shares) was released, showing at box 8A that Invesco now had a holding of 30.05% of Chemring’s issued share capital.
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1 December 2011
Changes will apply during the 2012 company meeting and voting season
The National Association of Pension Funds (NAPF) issued an updated version of its Corporate Governance Policy and Voting Guidelines on 25 November 2011. A NAPF note explaining the changes – which are minor, and principally concerned with the importance of gender diversity on boards and encouraging companies to state fully the skills and experience that a director brings to his or her role – from the previous version of the Guidelines can be read here.
The purpose of the Guidelines “is to assist investors in their interpretation of the provisions of the UK Corporate Governance Code when assessing a company’s compliance with it”. For other recent developments in corporate governance, click on our “Corporate governance” category.
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