Report on the Activities of the Israel Securities Authority. For 2011

Transcription

1 Report on the Activities of the Israel Securities Authority For

2 Table of Contents I II III Functions of the ISA The ISA and its Employees ISA Departments IV Research, Development and Economic and Strategic Counseling Department 1. Strategic counseling 2. Economic counseling 3. Committee on Increasing Competitiveness in the Economy 4. The materiality requirement for restatements 5. Cooperation with the Milken Institute and the Koret Foundation 6. Competitive procedure for conducting research with the Department of Research, Development and Economic and Strategic Counseling 7. Research cooperation between the ISA and academic institutions 8. Supervision over the secondary market and Stock Exchange V. Corporate Finance Department A. General B. Supervision 1. Public Reporting data and highlights (a) (b) (c) (d) (e) (f) (g) Prospectuses and capital raising Reporting requirements Financial reporting and valuations 1. Review of financial statements 2. Valuations Transactions with a controlling shareholder Private offerings Purchase offers Bond settlement agreements and bond trustees 2. Reports filed with the ISA and requests for exemptions/extensions (a) (b) (c) Termination of reporting requirements Exemption applications Extension applications 2

3 VI 3. Audits and outsourcing in the Corporate Finance Department 4. Underwriter registry 5. Dual listing C. Regulation staff position papers and special projects in Staff and Plenum position papers and FAQs 2. Requests for pre-ruling 3. Accounting and auditing enforcement decisions (a) (b) Decisions on accounting issues Decisions on auditing issues 4. Special projects in 2011 (a) (b) (c) (d) (e) (f) (g) (h) D. Enforcement The Reporting Improvement Project Underwriting Corporate Governance Amendments 16 and 17 to the Companies Law ATM Revocation of Regulation 51(b) Supervision over Independent Auditors (PCAOB) Handling the crisis Public shells 1. Financial sanctions Investment Department 1. Mutual funds a. General b. Permits to hold means of control in fund managers and licensing of fund managers and trustees c. Prospectuses d. Reports e. Fund manager participation in general meetings f. Onsite audits of mutual fund managers g. Supervision of mutual fund trustees h. Regulation activities i. Enforcement measures concerning fund managers 2. Exchange Traded Notes (ETNs) 3

4 VII VIII a. General b. Prospectuses c. Trustees d. Reports e. Enhancement of ongoing disclosure and development of audit mechanisms f. Audits of ETN Managers g. Regulatory model h. Pre-rulings 3. Investment advisors, investment marketing agents and investment portfolio managers a. General b. Licensing c. Supervision d. Regulation activities e. Enforcement activities concerning license holders 4. Legislation Activity Involving the Department a. Primary Legislation b. Subsidiary Legislation 5. Judicial proceedings involving the ISA Department of Supervision over the Secondary Market 1. The Department s purview 2. Regulation activities Legal Counsel Department 1. Legal Counsel responsibilities 2. Key activities in Agenda for the coming Year highlights a. Coordinating and supporting civil suits b. Funding of class and derivative actions and removal of barriers to private enforcement c. Tenders and contracts d. Public inquiries e. Report by the Freedom of Information Officer 4

5 IX X XI XII XII f. Contact details Legislation Department a. General b. Special projects in 2011 c. Primary and secondary legislation published in the reporting year d. Proposed primary and secondary legislation e. Private and government bills pertaining to ISA operations f. Directives Criminal Enforcement Department 1. Criminal indictments 2. Criminal cases pending in court 3. Criminal Verdicts in Trial Court 4. Verdicts in criminal appeals Investigations and Intelligence Department International Affairs Department 1. General 2. Participation in international forums 3. Financial Sector Assessment Program ( FSAP ) 4. Bi-lateral recognition 5. Signing agreements for cooperation on information exchange 6. Study delegations 7. Cooperation on enforcement and exchange of information 8. Regulation of custodians 9. Activity as part of the Committee for Implementing the Prohibition on Investing in Corporations Dealing with Iran Law Information Systems Department 1. Electronic Reporting MAGNA 2. Document archiving and automated office 3. Operational system 4. The ISA website 5. Central Information System (CIS) AMIGO 6. Computing for the Investigations and Intelligence Department 7. Forms and payments system 8. BI irregular trading system 5

6 9. Knowledge management search tools 10. Knowledge management organizational portal 11. Human resources system 12. Integrated voting system 13. Infrastructure: servers, communications, and information security Appendixes Appendix 1: 2011 Budget Implementation Report Appendix 2: Approved Budget for 2012 Tables Table 1: No. of applications for permits to publish prospectuses vs. permits granted in Table 2: Issues and offerings by way of shares, convertible securities and bonds in Table 3: Shelf Prospectus Reports in Table 4: Initiated review of financial statements in Table 5: No. of transactions with controlling shareholders in Table 6: Private offerings (substantial and exceptional) in Table 7: Purchase offers in Table 8: Companies which ended their reporting requirements in Table 9: Exemption applications filed in Table 10: Extension applications filed in Table 11: Underwriter registry in Table 12: Requests for pre-ruling in Table 13: Financial sanctions imposed in Table 14: No. of mutual funds and value of assets under their management in Table 15: Statistical data regarding mutual funds, by classification, for 2011 Table 16: Participation rate of mutual fund managers in general meetings in which they are required by law to participate and vote in Table 17: Violations for which fines were imposed in 2011 and fine amounts Table 18: Total no. of licenses granted to individuals portfolio managers, investment advisors and investment marketing agents in Table 19: No. of license applicants added each year in

7 Table 20: Exam success rates in 2011 Table 21: Violations for which fines were imposed and fine amounts Table 22: Violations for which fines were imposed in 2011, for which notifications were sent in 2012, and fine amounts Table 23: Violations for which financial sanctions were imposed in 2011 and fine amounts Table 24: Quantitative data on primary legislation, by year Table 25: Quantitative data on secondary legislation by year Table 26: Cases forwarded to the Department of Investigations and Intelligence in the past five years, by type of violation Table 27: Administrative probes transferred to the Investigations and Intelligence Department, by type of violation Table 28: Cases where it was decided whether or not there was sufficient prima facie evidence that an offense had been committed in the past five years Table 29: Distribution of investigation cases forwarded to the District Attorney's Office in the past five years, by main type of violation Table 30: MAGNA activity data for 2011 Charts Chart 1: Funds classified according to percentage of funds asset value Chart 2: No. of Trust Funds in Chart 3: Asset Value of trust funds in Chart 4: No. of ETN series in Chart 5: Value of Public Holdings of ETNs in Chart 6: No. of reports filed by ETN managers in Chart 7: Total value of assets under management by portfolio management companies in Chart 8: Licensing examinees (by no. of exam units) in Chart 9: Processing of exemption applications in Chart 10: Processing of internship applications in Chart 11: IMF comparison between the ISA and leading regulators around the world 7

8 April 15, 2012 To: Dr. Yuval Steinitz, MK Minister of Finance Ministry of Finance To: Mr. Moshe Gafni, MK Chairman of the Knesset Finance Committee The Knesset Dear Sirs, Re: Report on the Activities of the Israel Securities Authority In accordance with Section 14 of the Securities Law of 1968 (hereinafter the Law), I respectfully submit this report on the activities of the Israel Securities Authority (ISA) for emerged a year which dispelled the sense of euphoria that characterized capital markets both in Israel and abroad following the temporary recovery from the global financial crisis which struck the markets in 2008 and the economic crisis which currently threatens Europe, the US and other countries. It seems that in 2011, investors internalized the fact that the financial crisis was still going on, and fear increased that additional publically traded companies in the Israeli capital market may be unable to meet their commitments to repay bonds they have issued to the public. In a period of crisis such as this, the Israel Securities Authority is required to exercise caution and dedicate time and human resources so as to provide maximum protection to investors. For this purpose, the ISA took actions so as to increase disclosure to investors, strengthen the position of current gatekeepers, and ensure that trust in the capital markets be preserved. The ISA's basic assumption which is supported by international institutions such as the International Monetary Fund and economic literature is that adequate, highquality regulation contributes to the stability of capital markets, which should serve as a significant vehicle for economic growth. In addition to effective supervision, the Israel Securities Authority intends in the upcoming year to enhance regulatory certainty, to avoid the use of creative accounting whose purpose is to improperly create "distributable surplus", to strengthen the position of bond holders in debt settlement agreements, to enable all investors to vote online, to regulate the activity of trading platforms, to abridge financial statements, to regulate supervision over independent auditors, as well as to strengthen corporate governance at the Tel Aviv Stock Exchange. In addition, the ISA began to prepare for regulating entities hitherto unregulated by legislation, such as rating agencies, proxy advisors, and broker dealers. These are expected to come under the ISA's supervision, which would ensure that their activity is carried out while the interests of investors remain protected. In 2011, the ISA began developing and implementing an active, strict supervision and enforcement strategy for the purpose of protecting the investing public. It does so while thoroughly examining the burden of regulation and the costs incurred by 8

9 reporting capital market entities (in terms of time, financial resources and human resources). In 2012, the ISA intends to implement cost/benefit regulation models, with the purpose of striking a balance between the need to fully protect significant capital market interests and the need to prevent regulatory overburdening for reporting entities. One of the regulatory cost/benefit model applications currently examined by the ISA is to create a regulatory scale, i.e. define different regulatory regimes for large and small corporations is expected to be highly challenging for the ISA. The projects which the ISA intends to promote this year are of supreme significance for ensuring the proper function of the capital market in Israel. The ISA s activities will be derived from a general strategy which is based on four key principles: Balance: Balancing of the regulatory burden placed on reporting entities while reinforcing market supervision and market discipline mechanisms. Proportionality: Supervising and regulating while taking into account cost/benefit considerations, i.e examining the cost of regulation for reporting entities in terms of time, money and human resources vs. benefits to the investing public. Transparency: Increasing regulatory certainty and transparency of the ISA s activity, as well as involving the public in legislative processes. Enforcement: Embedding adequate norms and self controls in the capital market, which would create deterrence as regards violation of the law and increase the public s faith in the capital market. Scope of activity data Corporations as of December 31, 2011, 687 corporations were traded on the Tel Aviv Stock Exchange, 535 of which were companies traded in Israel alone, 63 were bond companies (i.e. companies which have only issued bonds to the public), 45 dually-listed companies, and 29 financial instrument companies. In 2011, the business sector in Israel raised NIS 3,988 million in shares, warrants and convertible bonds, NIS 2,997 million of which were raised locally, as compared with NIS 8,476 million raised in This year, the business sector raised NIS 31,979 million through the issue of bonds (excluding convertible bonds), as compared with NIS 38,228 million in the previous year. Furthermore, the business sector raised NIS approximately NIS 935 million through the exercise of warrants, as compared with approximately NIS 950 million in the previous year. Mutual funds The number of active mutual funds reached 1,261 in 2011 (as compared with 1,247 mutual funds as of the end of 2010), managed by 22 fund managers. The value of assets under management of mutual funds as of the end of 2011 reached NIS billion, as compared with NIS billion as of the end of The reduction in the value of assets stems mainly from excess redemptions in the mutual funds sector. 9

10 Exchange Traded Notes (ETNs) at the beginning of 2011, seven groups of issuers were active in the Exchange Traded Notes (ETN) market, some of which included a number of companies each. During 2011, a consolidation process in the field began. As of today, five groups of companies issuing ETNs are active, following the consolidation of the Tachlit Group with the Index Group, and the consolidation of the Meitav Group with the Mabat Group. As of year's end, the number of ETN series stood at 459, as compared with 437 ETN series as of the end of Public holdings in ETNs at the end of the reporting year were valued at NIS 56.8 billion, as compared with NIS 57.7 billion as of the end of 2010, a decrease of approximately 1.6% (approximately NIS 1 billion). The decrease in the value of public holdings was the result of a fall in market prices of the series underlying assets, despite positive accumulation during 2011 (approximately NIS 5.4 billion). Investment advisors and portfolio managers as of the end of 2011, there are 5,302 registered licensees in this field, 995 of whom are portfolio managers, 3,698 investment advisors, and 609 investment marketers. Furthermore, there were 181 licensed firms, of which 144 were investment portfolio management firms, 11 investment advice firms, and 26 investment marketing firms. The value of assets under management by licensed portfolio managing firms as of the end of 2011 reached NIS 232 million, the same as the value of assets managed by these companies as of the end of Special projects and key activities 1. Improved Financial Reporting Project During 2010, the Israel Securities Authority launched an extensive project to improve reporting by corporations, so as to increase the relevance of the disclosure procedure, rendering it more useful to the investing public for the purpose of making investment decisions. The key principles of the project were published for public comment during 2011, and in 2012, the ISA staff intends to publish a proposed amendment to the Securities Regulations which reflects all the aspects of the project. For this purpose, the ISA s staff met with various market players, including representatives of institutional entities, lawyers, underwriters, CPAs and analysts. These meetings yielded that, in general, the market s view is that the "description of a company's business" is positive and undoubtedly represents a significant improvement as compared with the period prior to the implementation of the Barnea Report. Nevertheless, it seems that the current disclosure provisions and their application are deficient. The main problem seems to be excess, immaterial information included in the statements, as well as lack of uniformity and clarity in the application of disclosure requirements and a lack of sufficient business disclosure from management s point of view. The Project includes, inter alia, modification of the reports format so that each chapter contains disclosure requirements with similar or identical purpose; setting industry-specific disclosure requirements; clarification of the principles of materiality and reporting from management s point of view; as well as determining extensive disclosure provisions for aspects of corporate governance. 10

11 2. Underwriting In the past few years, security offerings have been made mostly without underwriters commitment or due diligence by underwriters. As a result, such offerings are conducted without an underwriter being responsible for possible misleading details in prospectuses. On the other hand, during this time, the significance of gatekeepers outside corporations has become all the more evident. When an offering of securities to the public is made, this becomes doubly important, since being party to the transaction corporations are motivated to paint a bright picture of their position. Underwriters have served as external auditors of the quality of discovery in prospectuses around the world as well as in Israel in the past. Since the situation in Israel has changed in the past few years, the ISA s staff published, at the end of 2011, an extensive paper addressing the manner in which underwriters should be included, once again, in public offerings and other types of offerings. During the upcoming year, the ISA intends to initiate legislation that would regulate the issue. 3. Supervision over Independent Auditors (PCAOB) Financial statements constitute a significant part of the overall disclosure to investors. For this reason, inter alia, there exists a profession, the purpose of which is to independently audit the information contained in these statements. Various reasons, including flaws discovered in the work of auditors and the problematic system according to which these auditors are paid by audited entities, have led most developed markets to the conclusion that an independent body should be established, the purpose of which would be to supervise the work of independent auditors auditing reporting companies. The flaws inherent in the independent auditor model, as well as the supreme significance of this profession, highlight the extreme significance of establishing such an independent statutory, non-for-profit body in Israel. This body would supervise, on an ongoing basis, accounting firms auditing reporting companies, and will be charged with the audit process conducted by its members, setting auditing standards and principles as regards quality control and independency, as well as improving the audit process on an ongoing basis The establishment of such a body, which would match similar bodies currently in existence in developed countries, also serves as a key condition to the ongoing development of the local capital market and encouragement of foreign investments. In 2011, the Corporate Finance Department conducted a thorough examination of this issue in a number of countries, in order to promote a legislative amendment on this issue in the upcoming year. 4. Handling the bond crisis In 2011, 30 debt settlement agreements were reached, valued at NIS 5.7 billion, as compared with 20 debt settlement agreements valued at approximately NIS 2 billion in 2010, and 38 debt settlement agreement valued at NIS 11 billion in 2009, at the height of the crisis. The Israel Securities Authority invests considerable resources in handling the debt settlement agreement phenomenon, and has developed throughout the year a regulatory toolbox intended to improve the protection granted to investors in times of crisis. This toolbox was derived from the ISA s systemic view, and the 11

12 tools contained therein may be divided into four main levels: the corporate disclosure level; the internal process level (on the part of companies), and the external processes (implemented by gatekeepers); the institutional activistic level; and the ISA s activistic level. As part of the ongoing handling of settlement agreements, the ISA examines disclosure provided by companies within settlement agreements and prior to them, as well as the need for publishing a prospectus as part of a settlement agreement in order to secure the interests of prospective offerees. As part of settlement agreements conducted under the auspices of the court in accordance with Section 350 of the Companies Law, the ISA is usually required to express its position regarding the manner in which the class meeting is conducted and the disclosure provided to the holders of securities. This is done in order to protect the interests of the investing public. In the upcoming year, the ISA intends to enhance its activity in response to the current liquidity crisis in world financial markets and examine the need to develop further tools in order to deal with risks both by early identification of risk sources in corporations and by developing tools which would enable optimal disclosure for securities holders for the purpose of pricing their investments in corporations during this time. In addition, the ISA will examine tools which would enable bond holders to better negotiate their interests when companies are in distress. 5. At the Market Offerings ATMs In 2011, ISA staff examined the possibility of implementing a public offering mechanism in use in the United States, which is entitled At the Market Offering (ATM). This type of offering enables corporations to sell securities whether these have been purchased on the secondary market or are issued for the first time during the regular course of trading at the stock exchange, thus saving on offering costs. A preliminary paper on the issue was published for public comment, and the possibility of promoting a legislative amendment thereof will be examined in Enforcement General The ISA is responsible for taking enforcement action in all operating segments under its purview, including imposing sanctions on violators and opening criminal investigations and administrative probes in cases where laws under the ISA s purview are violated. As part of its roles, the ISA conducts complex and intricate investigations and collects information from various sources on an ongoing basis. The information is reviewed, analyzed and evaluated by the ISA, using IT systems. In addition, the ISA conducts additional intelligence activities in order to support, corroborate or refute this information, ensuring the secrecy of the process. 12

13 Criminal Enforcement In 2011, the ISA s Investigations and Intelligence Department identified and investigated a number of securities trading incidents in institutional entities, in which senior officers and employers allegedly engaged in fraudulent activity. In addition, the Department located and investigated events in which individuals connected to controlling shareholders of publically traded companies engaged in activities suspected as securities fraud. During the reporting year, the ISA forwarded to the District Attorney s office nine cases after investigating them. In addition, as part of the ISA's strategy of involvement in the globalization process, in 2011 the Department responded to foreign authorities judicial inquiries requests in accordance with treaties signed by the ISA. In addition, cooperation between the ISA s Investigations and Intelligence Department and other enforcement agencies continued to increase, as well as cooperation with Israeli enforcement agencies as part of their joint efforts to defeat economic criminal activity. In 2011, the Securities Department at the Tel Aviv District Attorney's Office (Taxation and Economics) filed eight indictments based on investigation files forwarded by the ISA, on charges of using insider information, fraudulently influencing securities prices, and various reporting charges. Administrative enforcement At the beginning of 2011, the Streamlining of ISA Enforcement Procedures Law (Legislative Amendments) of 2011 became effective. The Law established a new administrative enforcement mechanism which would exist side by side with the criminal enforcement system under the Securities Law. Under the law, an enforcement committee which included six members was established. The committee includes two panels of three members each. The chairmen of both panels are retired judges appointed by the ISA, and the other four members of the committee are lawyers and capital market professionals appointed by the Minister of Justice. The committee exercises enforcement procedures due to administrative violations of the Securities Law of 1968, the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law of 1995 (hereinafter the Advice Law), and the Joint Investment Trust Law of In addition, the committee will discuss license revocation or suspension due to reliability faults under the Advice Law. Administrative procedures against violators are initiated following approval by the Chairman of the ISA. As a result, an administrative proceeding system was established at the ISA, which is responsible for preparing administrative claims based on administrative probes and managing the cases for the ISA in front of the administrative enforcement committee. In 2012, the ISA began implementing administrative enforcement, following a decision by the committee to approve an enforcement arrangement as regards the Mivtach Shamir firm and the Apex Tnuva Group. This arrangement demonstrated the ISA s intention to implement the administrative enforcement tools granted to it in a proportional and balanced manner, which was also manifested in the committee s decision that the financial sanction agreed upon in the enforcement arrangement was 13

14 indeed reasonable and proportionate, but was not adequately severe, given the identity of the violators and gravity of their violations. The global context Financial Sector Assessment Program (FSAP) In November 2011, a delegation of the International Monetary Fund (hereinafter the IMF) arrived in Israel in order to conduct an assessment of the financial sector in Israel (FSAP). The latter is an extensive procedure which assesses the stability of the financial sector and quality of supervision thereof, as well as whether the existing infrastructure enables it to function properly all in light of international standards. This assessment procedure was conducted by a delegation of experts specializing in capital markets, banking, insurance, payment systems, clearing, etc. The delegation visited Israel for a period of two and half weeks, during which its members met with numerous senior government officials, including the Minister of Finance, the Governor of the Bank of Israel, the Chairman of the Israel Securities Authority, the Capital Markets Supervisor and the Supervisor of Banks, as well as with a representatives of a number of institutions and privately held entities in each sector. The assessment of the Israel Securities Authority was conducted by representatives of the International Monetary Fund, in accordance with a methodology developed by the International Organization of Securities Commissions (hereinafter the IOSCO), which includes a set of 38 principles that serve as a comparative scale to the desirable modus operandi of a securities regulator. The Israel Securities Authority was fully assessed for meeting 29 principles (one was excluded from the survey). It was also assessed, without being graded, in relation to the eight remaining principles lately adopted by the IOSCO, in terms of the ISA's readiness to adopt these principles. The principles according to which the Israel Securities Authority was assessed include, inter alia, enforcement standards, supervision over the secondary market, supervision of intermediaries, supervision of issuers, supervision of mutual funds and cooperation. The final report of the International Monetary Fund was published in April 2012, and its findings show that internationally speaking the ISA s functioning and level of regulation it exercises places it in line with the world s foremost securities commissions. A comparison between the Israel Securities Authority s evaluation and those of leading securities commissions worldwide yields that Israel scored the highest number of fully implemented principles. Bi-lateral recognition In 2011, the European Securities and Markets Authority (ESMA) decided to recognize the Israeli regulation regarding the content and format of a prospectus in accordance with the Securities Law. The significance of this decision is that an Israeli prospectus, with the addition of several details, may be filed in all 27 EU countries, for the purpose of listing publically traded Israeli companies on European stock exchanges. The recognition of Israeli regulation is a precedent in the European Union. It is the first time that the ESMA has exploited the newly acquired power granted to European regulators under the European Prospectus Directive and Transparency Directive to recognize regulation regimes outside Europe as equivalent. The decision to recognize Israel represents a positive indication regarding the nature and quality of the Israeli regulation. 14

15 Additional goals of the ISA for 2012 Online voting system The Israel Securities Authority attaches great importance to increasing activism on the part of shareholders and bondholders from amongst the public. Such activism can be expressed, inter alia, through participation in meetings and involvement in decision making processes which shareholders and bondholders may participate in. In effect, the rate of participation in meetings from among the public is minute, and it seems that the reason for this is the amount of time consumed by actual arrival to a meeting, which does not always justify the benefit that investors see in participating in shareholder or bondholder meetings. Thus, the Israel Securities Authority decided to lower the abovementioned bar, and began developing an innovative computerized system, which would enable holders of securities to participate in general meetings and vote remotely through the internet, using a simple, no-cost process. The system is intended for all holders of securities, including institutional investors who are obligated to participate in meetings. The technological development process is nearing its final stages. In 2012, the ISA intends to promote legislative amendments which would enable this system to be activated. Regulating brokers and dealers Investment intermediaries investment advisors, portfolio managers, mutual fund managers, ETN managers, analysts, rating agencies, brokers and dealers are important to the proper functioning of the capital market. The significance of intermediaries stems from their liaising between the public and the capital market. Since the public s trust is crucial to capital markets, the reliability of investment intermediaries is essential to the stability of the financial system. As of today, most intermediaries are subject to regulation whether directly or indirectly. However, some types of intermediaries and activities are not regulated by law. Performing transactions for others (brokerage), performing transactions for others with an intermediary s own account (dealer) and providing custody services for clients assets and clients cash these services are currently unregulated in terms of providing adequate protection to clients using the services of intermediaries and placing their trust in them. In the coming year, the ISA intends to provide regulatory response to the existing situation by establishing a legislative framework which would apply to the activity of brokers, dealers and custodians. The provisions of the law will obligate intermediaries to register or obtain licenses, and their activity will be regulated and supervised by the ISA. In addition, rules and binding provisions will be set regarding the relationship between those intermediaries and their clients, the duties of trust and care and duties to uphold the interests of clients. Beginning of supervision over trading platforms During 2012, regulations that would grant the Israel Securities Authority the power to supervise alternative trading platforms, which have never been supervised, are expected to be approved. The activity of these platforms has exposed investors to disclosure risks, stability risks and other risks. The ISA s supervision over this area is 15

16 essential to protecting the investing public, and the ISA intends to be highly active in this area, establishing a new licensing, regulation, supervision and enforcement system. New supervision regime for Exchange Traded Notes In the past year, the ISA published underlying principles for a new supervision model over Exchange Traded Notes (ETNs). The aim of the model is to handle the various risks that arise from ETN activity operational risk, market risk, credit risk, and liquidity risk. The key principles of the supervision model are: Moving onto a regulated regime regulating the ETN sector under the Joint Investment Trust Law. This constitutes a move from a disclosure regime to a supervision and regulation regime, applying the principles of mutual funds' corporate governance and strengthening the position and responsibility of trustees. Market risks models were defined for measurement and management of market risks, including the VaR model and extreme scenarios. Investment and credit risk principles establishing principles regarding the types of investments that ETN firms would be permitted to make, the limits on entities in which they may invest and other aspects of internal supervision over such investments. Liquidity a number of limits have been set regarding non-liquid backing assets, including the revaluation of assets according to their value upon immediate withdrawal. Allocation of risk capital model the model establishes the allocation of capital required for operational risk, market risk, and credit risk, in order to neutralize economic incentives to create exposures, and on the other hand encourage solid behavior among ETN issuers. These principles shall be regulated in legislation as part of the process of regulating the activity of the ETN sector, through early adoption of most principles in the ongoing activity in ETNs. Abridging of financial statements For some time, the ISA has had the intention of handling the issue of the growing length of financial statements, which may impair investors ease of use and render their understanding and investment decision making more difficult. Thus, the ISA decided to initiate a process which would include supervised entities and the public to examine ways in which to abridge the scope and reduce the complexity of details included in financial statements. As an initial step, the ISA issued a call to capital market players to propose ideas and possible solutions to abridge the financial statements. The ISA intends to conduct a symposium on this issue later in the year in order to examine how to reach this goal. Tests and conditions for dividend distribution According to the Companies Law, a corporation may distribute dividends if two requirements are met: The first is an accounting test, which examines whether a company has distributable profits, while the second is a material-economic test which 16

17 examines whether a distribution would impair the company s solvency. A distribution which does not meet the accounting test requires court approval. The purpose of the accounting surplus test is to enable a company which has a sufficient cushion, or which has been profitable for the past two years, to approve a distribution of dividend using a relatively simple procedure, without involving the court, provided that the board of directors has taken responsibility for the company's meeting the solvency test. Nevertheless, it should be noted that the Companies Law was enacted in 2000, in an accounting environment that was radically different than that in existence today. Several years after the Companies Law was enacted, the International Financial Reporting Standards (IFRS) were adopted in Israel, causing a veritable accounting revolution. IFRS raise material questions which the Israeli legislators did not and could not foresee when enacting the Companies Law. One of the main questions is whether a company s revaluation profits, which are based on valuations, qualify as distributable profits. Yet this is not the only question. A number of companies have lately reported their intention to adopt IFRS 9 early, enabling them to redesignate financial assets which have accumulated losses and were charged to net income to other comprehensive income. Such a move raises the question of whether when applying the accounting surplus test for the purpose of dividend distribution, losses derecognized from the net income line item following the adoption of IFRS 9 should be taken into account. In order to remove any doubt on the matter and create the legal certainty necessary for the capital market to function properly, the ISA approached the Ministry of Justice at the beginning of the year, requesting a speedy procedure for passing regulations under the Companies Law, which would include in the accounting surplus test losses derecognized as a result of implementing IFRS 9. This solution does not, of course, exclude the need for a comprehensive arrangement of proper distribution rules for the long term, which would take into account changes that have occurred in accounting since the enactment of the Companies Law. Rather, it serves as a temporary solution to a specific problem which stems from the provisions of IFRS 9. In addition to this specific solution, the ISA intends to examine, with the Ministry of Justice, a comprehensive solution to the dividend distribution issue later in the year. Regulatory scale and applying cost/benefit models One of the ISA s main goals in the upcoming year is to examine cost/benefit models in regulation. This goal is in line with the ISA s view of its role of regulator as one which warrants striking an ongoing balance between the need to fully protect significant capital market interests and the need to refrain from overburdening supervised entities with regulation requirements. One of the possible applications in a cost/benefit regulatory model is to create a regulatory scale. In other words to create different regulatory regimes for large corporations as compared with small corporations. This is a complex issues with considerable pros and cons. On the one hand, the ISA is aware of small corporations difficulties in fulfilling all requirements imposed on them by law, since these demand significant time, money and human resources in relation to the resources available to them and may be detrimental in terms of efficient resource allocation through the capital market. On the other hand, the fear is that compliance with regulation by small corporations is often lacking, and reducing the requirements imposed on these 17

18 corporations may result in compromising the interests of investors. Thus, the right balance needs to be found. One recent example of a varied application of regulation is the ISA s legislative initiative as regards corporate governance in portfolio management firms. This initiative included a distinction between large and small portfolio managers, and applied extended corporate governance rules only to large portfolio management firms. In addition to assessing alternatives for varied regulation, the ISA intends to examine possible steps for mitigating regulation requirements, provided these result in no harm to the investing public. As part of the aforementioned, the ISA conducts meetings with supervised entities and firms representing them, in order to find out about regulatory overburdening and enable them to propose alternative models for striking a balance and creating proportionality in regulation. After receiving feedback from the market and players, the ISA intends to examine and implement models for examining cost/benefit in regulation, while creating some exemptions for supervised entities in order to achieve regulatory balance and proportionality without compromising the interests of investors. Respectfully, Prof. Shmuel Hauser 18

19 I Functions of the ISA The Israel Securities Authority (ISA) was established under the Securities Law of 1968 (hereinafter the Securities Law), and its function, as stated in the Law, is to protect the interests of the investing public. Within the framework of its mandate, the ISA handles, inter alia, the following issues: 1. Granting permits to publish prospectuses in which companies offer securities to the public, and prospectuses in which mutual funds offer units to the public; 2. Reviewing the following reports filed by reporting entities: a. Current immediate reports, quarterly and annual financial statements; b. Reports regarding transactions between a company and a controlling shareholder therein; c. Reports on private offerings by companies; d. Purchase offer specifications; e. Mutual funds' current reports; 3. Regulating and supervising the activities of the mutual fund sector; 4. Licensing portfolio managers, investment advisors and investment marketers, regulating their activity and supervising them; 5. Ensuring the compliance of portfolio managers and non-banking members of the Tel Aviv Stock Exchange (hereinafter the Stock Exchange) with the Prohibition of Money Laundering Law of Supervising the proper and fair activity of the Stock Exchange; 7. Conducting investigations regarding violations under the Securities Law, the Joint Investment Trust Law of 1994 (hereinafter the Joint Investment Law), the Regulation of Investment Advice and Investment Portfolio Management Law of 1995 (hereinafter the Advice Law), and violations of other laws where related to violations of the aforesaid laws. 8. The ISA collaborates with the Institute of Certified Public Accountants in Israel in financing and operating the Israel Accounting Standards Board. In accordance with the Securities Law, the Chairman of the ISA and its members are appointed by the Minister of Finance. Some of the members are appointed from among the public while others are civil servants; one of them is an employee of the Bank of Israel. The ISA employs accountants, lawyers, economists and administrative employees. 19

20 II The ISA and its Employees As of the end of December 2011, the members of the ISA plenum were as follows Prof. Shmuel Hauser, Chairman; Mr. Yaheli Cahanov, Adv.; Mr. Haj Ihie Hani, CPA; Dr. Eti Einhorn; Dr. Lea Paserman-Josefov; Dr. Keren Bar Hava; Ms. Oranit Kravitz, Adv.; Mr. Eldar Duchan. Mr. Eyal Epstein; Mr. Barry Topf. The ISA Plenum usually meets once a month. The ISA Plenum also deals, through the ISA s committees, with granting applications for permission to publish prospectuses; granting exemptions and extensions; stock exchange issues; issues relating to the ISA s finances and budget; the independence of auditors in companies subject to the Securities Law; issues relating to the licensing of investment advisors, investment marketers, and investment portfolio managers; issues relating to the imposition of civil fines on mutual fund managers, as well as other issues, as needed. In 2011, the ISA Plenum held 16 meetings; the Disclosure and Reporting Committee held 51 meetings; the Secondary Market Committee held six meetings; the Fines and Financial Sanctions Committee held three meetings regarding class actions, five meetings regarding civil fines under the Regulation of Investment Advice and Investment Portfolio Management Law of 1995 (hereinafter the Investment Advice Law), and two meetings regarding the imposition of civil fines under Section 114 of the Joint Investment Trust Law; the Supervision and Regulation Committee held seven meetings regarding the granting of licenses and permits under the Joint Investment Trust Law and the Investment Advice Law; the Finance Committee held three meetings; the Audit Committee held five meetings; the Tender Committee held 40 meetings. 20

21 As of the end of December 2011, the members of the ISA plenum were as follows Chief Legal Counsel; - Amir Wasserman, Adv. 1 Senior advisor to the chairman; Head of the International Affairs Department; Head of the Investigations and Intelligence Department; Head of Administrative Enforcement; Secretary General; Head of the Securities Department at the Tel Aviv District Attorney's Office (Taxation and Economics); Head of the Research, Development and Economic and Strategic Counseling Department; Head of the Information Systems Department; Head of the Corporate Finance Department; Head of the Investment Department; Director of the Investor Education Unit and ISA Spokesperson; Head of the Department of Supervision over the Secondary Market; Head of the Legislation Department Moti Yamin, Adv. 2 Ms. Yael Almog, Adv. Mr. Nir Bar-On, Adv. Dr. Ilana Modai, Adv. Mr. Oded Shpirer, Adv. Ms. Orli Doron, Adv. Dr. Gitit Gur-Gershgoren Mr. Natan Hershkovitz Ms. Shirel Guttman-Amira, Adv. Mr. Dudu Lavi Ms. Sharona Mazalian- Levi 3 Mr. Ronen Madar, CPA Ms. Daniele Rimon, Adv. At the end of December 2011, a total of positions were staffed, as follows: Chairman s Office - 4 positions; Legal Counsel - 5 positions; Legislation - 4 positions; Department of International Affairs - 4 positions; 1 On September 25, 2011, Adv. Amir Wasserman was appointed as the ISA's Chief Legal Counsel, in lieu of Adv. Shoni Albeck. 2 On June 1, 2011, Adv. Moti Yamin was appointed as Chief Advisor to the Chairman of the ISA, in lieu of Adv. Yael Almog. 3 On November 1, 2011, Ms. Sharona Mazalian-Levi was appointed as the ISA Spokesperson, in lieu of Mr. Ori Katzir. 21

22 Corporate Finance Department positions; Investment Department positions; Securities Department at the Tel Aviv District - 14 positions; Attorney's Office 4 Administrative Enforcement - 4 positions; Investigations and Intelligence Department positions; Research, Development and Economic and Strategic Counseling Department - 5 positions; Information Systems Department - 7 positions; Department of Supervision over the Secondary Market Secretarial, Administrative, Finance and Human Resources - 10 positions; positions; Interns - 9 positions; Students - 15 positions; The approved manpower quota as of the end of December 2011 stood at 227 positions. The portion of men and women at the ISA, as of December 2011, is equal. The percentage of academics at the ISA is approximately 90% of the employees, who are mostly lawyers, CPAs and/or economists. The budget of the ISA is funded by annual fees payable by companies that are subject to the Securities Law and the Joint Investment Trust Law; by fees payable for applications to receive permits to publish prospectuses and private offerings; by licensing fees payable by investment advisors and investment portfolio managers, and by fees payable by the Tel Aviv Stock Exchange. The ISA budget is approved by the Minister of Finance and the Knesset Finance Committee. 4 The approved positions include lawyers who are employed by the ISA for the purpose of assisting the office of District Attorney in carrying out its roles in matters relating to the Israel Securities Authority. For this purpose, the ISA employs 14 lawyers and five interns. 22

23 III ISA Departments Research, Development and Economic and Strategic Counseling Department The Department s role is to extend economic counseling to the Chairman of the ISA and to the Organization s various departments, on matters which are economic in nature. The Department takes part, on a regular basis, in staff discussions and recommendations subjected to the approval of the Stock Exchange Committee and in various tasks of ISA work teams dealing with various subjects, including proper trading in the Stock Exchange, the Stock Exchange Rules & Regulations, new financial instruments, the ISA budget, etc. Corporate Finance Department The staff of the Corporate Finance Department, which includes accountants and attorneys, is responsible for the real time monitoring of current reports issued by reporting entities, including immediate reports, as well as interim and annual financial statements. Monitoring includes the review and examination of reports with an emphasis on: level of disclosure; compliance with the provisions of the Securities Law and Regulations; enforcement of GAAP; and examination of the legal, accounting, and economic aspects involved therein. The Department s staff is charged with handling complex, often interrelated, legal and accounting issues and with identifying market failures that require the ISA s intervention. Special effort is dedicated in cooperation with the Investigations and Intelligence Department - to preventative activity based on intelligence. Investment Department The Investment Department is in charge of the licensing, supervision, and regulation of various kinds of investment intermediaries, which include mutual fund managers, mutual fund trustees, managers of Exchange Traded Notes (hereinafter - ETNs), ETN trustees, investment portfolio managers, investment advisors and investment marketers. The Department s headquarters include, inter alia, the Department s legal counsel, as well as five functional units, as follows: 1. Licensing Division; 2. Supervision of Mutual Funds Division; 3. Supervision of Licensees Division; 4. Financial Instruments Division; 5. Audit Division. Department of Supervision over the Secondary Market The Department coordinates the ISA s supervision and control over the proper and fair management of the Tel Aviv Stock Exchange (hereinafter the Stock Exchange). The Department s authority stems from the provisions of the Securities Law, focusing on the provisions of Chapter H of the Law, which deals with the ISA s 23