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In-depth The AMF: AMF functioning & financial sector reforms

Economic Modernisation Act and orders taken on the basis of an empowering provision (in the said Act)”

Published on February 4, 2009

The Economic Modernisation Act 4 August 2008 (LME) is the source of many modifications of financial law intended to make the Paris marketplace more competitive and attractive, either by making direct changes to the law or by authorising the government to take the necessary legislative measures by issuing Orders. Regarding the powers of the AMF, these modifications can be divided into two groups. The first concerns issuers and corporate financing and addresses public offers, share buy-back programmes, major holding notifications and declarations of intent, preference shares, financial instrument law and the law on companies in difficulty. The second concerns service providers and investment products and addresses money laundering, discretionary asset management, closed-ended investment companies and foreign closed-ended funds and marketing of financial products.

Modifications relating to issuers and corporate financing

Reform of public offers

The Order of 22 January 2009 extensively reforms public issuance in order to make French law easier to understand for foreign issuers. The main focus of the reform is the abolition of the concept of “appel public à l”épargne” encompassing both listing on a regulated market and issuance or sale of securities to the public. The order reforms French financial law by separating these two concepts and giving them separate legal systems. At the same time, the status of “émetteur faisant appel public à l’épargne”, which had no equivalent in European law, disappears.

The legal system for issuers whose securities are admitted to trading on a regulated market remains unchanged and is subject to the European Prospectus, Transparency and Market Abuse Directives. Issuers whose securities are listed on Alternext remain bound by the legal obligations demanded by the market operator. However, issuers making offers of securities to the public without applying for admission to trading on a regulated market or on Alternext will only be subject to the one-off obligation to publish a prospectus approved by the AMF ahead of the operation.

The Order also offers issuers the possibility to increase their capital without a public offer, by private placement on the price terms provided by the Commercial Code and subject to an upper limit of 20% of the equity per year.

Simplification of the share buy-back system

The LME gives companies whose shares are admitted to trading on organised multilateral trading facilities (Alternext) the possibility to engage in share buy-backs to enhance liquidity of their securities. It also authorises the government to legislate by order to simplify the system for disclosing share buy-backs. The Order of 30 January 2009 therefore amends Articles L. 225-209 to L. 225-211 of the Commercial Code to relax requirements on implementing liquidity contracts and to simplify and improve related disclosure requirements.

For the implementation of liquidity contracts, the new text abolishes the obligation to convert shares bought back under a liquidity contract to registered form and provides for only the net balance of purchases to be taken into account to calculate the 10% of capital limit. Therefore, when shares are bought back to enhance liquidity, the number of shares taken into account to calculate the 10%-of-capital limit corresponds to the number of shares bought less the number of shares sold during the authorisation period.

To improve the consistency of information in share buy-back disclosure, the Order contains two series of measures. First, it abolishes the obligation for the company to draw up a special report, as this merely served the same purpose as the information to be included in the annual management report, and completes the information in that report with the items currently included only in the special report, which is to say the information on the objectives of the buy-back (number of shares and any reallocations there may have been). Secondly, the Order abolishes the obligation for the AMF to inform the public of the monthly declarations of purchases and sales by companies of their own shares, with companies now being required to provide weekly information to the market by publishing it on their website.

Modernisation of the threshold crossing and declaration of intent system

The Order of 30 January 2009 on share buy-backs, threshold crossing declarations and declarations of intent enhances financial market transparency:

> By extending the threshold crossing declaration system to certain derivatives: to assess whether they have crossed a threshold or not within a company, investors must include along with the shares they hold in the company any derivatives giving the bearer the right to acquire shares at their sole initiative; other derivatives, and notably those providing for cash-settlement only, are disclosed separately,

> By rationalising the content and terms of shareholder declarations of intent:

  • adding two new thresholds requiring a declaration of intent (15% and 25%),
  • abolishing the specific circumstances obligation as a condition to modify the declaration of intent,
  • adding new items to the content of the declaration (the strategy and operations to implement it, and any temporary transfer agreements) as defined by the AMF General Regulation,
  • limiting the duration covered by intentions to 6 months and shortening the deadline for filing with the AMF to 5 days.

Liberalisation of the preference shares system

The LME deprives preference shares of preferential subscription rights when they are non-voting shares. Regarding the abolition of the preferential subscription right, the Order of 6 November 2008 specifies that the condition relating to the absence of voting rights is appraised “on issue” of the preference shares, in order to take account of the hypothesis of the share gaining voting rights after issue. The Order also abolishes the possibility for companies listed on a regulated market to buy back preference shares on grounds of the illiquidity of the securities: the system provided by Article L. 228-12 of the Commercial Code applies.

Reform of securities law

In order to make French law easier to understand, particularly to foreign investors, the Order of 8 January 2009 reorganises the classification of financial instruments, dividing them into two sub-categories: financial securities and financial contracts. Financial securities include equity and debt securities as well as shares and units in collective investment undertakings. Financial contracts are financial futures.

Reform of collective proceedings

The main objective of the Order of 18 December 2008 is to make the safeguard procedure introduced in 2005 more accessible and attractive. The Order therefore eases the conditions on opening such procedures, encourages managers to make greater use of it and improves the company reorganisation conditions, notably the workings of the creditor committees, in order to facilitate preparation of the safeguard plan.

Improvements are also made to conciliation, although without taking away from the amicable and confidential nature of the procedure.

The working of judicial liquidation is also enhanced, by favouring use of the simplified procedure and enhancing the efficiency of the ordinary law procedure. In order to remedy the difficulties encountered in practice, the wage guarantee is extended in the case of judicial liquidation with provisional continuation of activity.

Modifications relating to service providers and investment products

Reform of money laundering measures

The main aim of the Order of 30 January 2009 on the prevention of use of the financial system for the purpose of money laundering and terrorist financing is to transpose into French law the European Directive of 26 October 2005 on the prevention of use of the financial system for the purpose of money laundering and terrorist financing and its implementing directive of 1st August 2006 and to bring the French system into compliance with the guidelines of the Financial Action Task (FATF).

It provides for a general ban on payments in cash above an amount set by decree and subjects foreign exchange bureaux to an authorisation system to conduct their activities.

It maintains the current system in which persons other than those subject to the prevention of money laundering and terrorist financing system who, in the course of their activity, know that financial operations concern the proceeds of an offence liable to a prison sentence exceeding one year, are required to report them to the Public Prosecutor.

It defines the list of professions subject to money laundering and terrorist financing prevention (largely similar to the list already in force) and specifies the terms on which the legal professions are subject to such obligations.

It defines client vigilance measures that may be adapted according to the risk presented by the client, the product and the nature of the business relationship (a decree will specify these criteria).

It extends the obligation to report any suspicious transactions to TRACFIN (“Traitement du renseignement et action contre les circuits financiers clandestins”) to ordinary law offences (sums or operations that may be the proceeds of an offence liable to a prison sentence exceeding one year) and adds in a principle of confidentiality.

It enhances legal security by stating that no action may be taken against a professional who is subject to the obligations and makes a report in good faith.

A substantial part of the Order is dedicated to the TRACFIN as the national financial intelligence unit, whose powers are increased.

The procedures and internal controls to be implemented by professionals subject to the obligations, the competent authorities and the administrative sanctions that may be incurred are also specified. Provision is also made for clients to have indirect access to data, meaning to information of a personal nature collected by professionals subject to vigilance obligations.

Reform of the rules on collective management for third parties

The Order of 23 October 2008 reforming the framework of discretionary asset management enhances the attractiveness of the framework of asset management, one of the key sectors of the French market.
It authorises collective investment schemes to have their prospectus approved in a widely-used language understood by the investors for whom it is intended. This will favour international distribution of French schemes.
It improves more specifically the framework of alternative management reserved for certain qualified investors, while preserving the distinction between products for the general public and products intended for qualified investors.
It offers liquidity management tools in the interest of investors and of financial stability, by allowing the ring-fencing of CIS assets that have become illiquid due to market conditions: the operation consists in splitting the CIS between liquid and illiquid assets.
Finally, it modifies the regulatory framework of CIS, abolishing rules that are not appropriate (obligation to appoint a replacement statutory auditor, publication of the number of voting rights in a SICAV).

Reform of the closed-ended investment company system (SICAF)

The Order of 30 January 2009 on closed-ended investment companies, foreign closed-ended funds and certain financial instruments modernises the legal framework of SICAFs by created an adapted investment vehicle for a long-term management policy. It also defines a single regime applicable to admission to trading on a regulated market or a multilateral trading facility of shares in a SICAF or units or shares in foreign closed-ended investment funds.

The Order also extends to collective investment undertakings, subject to some adaptations, the possibility that exists for a joint stock company issuing financial instruments to obtain from the central securities depositary, in return for payment, the necessary information to identify its shareholders. This mechanism gives collective investment undertakings of all kinds the possibility to establish dialogue with significant shareholders in the event of a crisis, and notably when liquidity problems arise. The information may be requested either from the central depositary or directly from the custody account keepers. The aim of this adaptation is to take account of collective investment undertakings that are not filed with a central depositary. Whatever means it is obtained by, the information may not be transferred, even free of charge.

Marketing of financial products

The order of 5 December 2008 implementing business conduct codes and terms governing relations between producers and distributors in the marketing of financial instruments, investment products and life insurance aims to enhance the protection of investors, retail investors and insurance policy-holders as regards the marketing of financial instruments, retail investment products and comparable life insurance products.

To this effect, it provides for two measures:

  • The possibility for the Minister for the Economy to approve codes of business conduct drawn up by associations representing the financial professions. The aim of such codes is to address the resources intermediaries must have to comply with their obligations in terms of the rules to be followed when selling financial products; it is the role of the AMF and the ACAM to ensure that the companies under their supervision implement appropriate means to comply with such codes,
  • The existence of agreements between producers and distributors regarding disclosure and promotional communication. The aim of this measure is to enhance the accountability of producers and distributors when preparing advertising documents for financial instruments, by clarifying their relations, whether distribution is by direct subscription, via retail investment products or via life insurance products.

The Order 30 January 2009 on marketing of life insurance products and collective provident and insurance operations notes that there has been a profound change in financial systems and that the boundary between investment products, financial investment and life insurance is a porous one. It therefore modifies the framework applicable to insurance organisations to:

  • specify the duty of advice applicable to insurance companies for sales of life insurance contracts, as is the case for investment services providers,
  • guarantee that the content of any advertising for a life insurance or capitalisation contract is accurate, clear and not misleading.

It also provides for a decree to define the treatment of loyalty guarantees in life insurance contracts in the event of a partial redemption of a contract. It defines certain terms of the creation, subscription or transfer of a PERP (Popular Retirement Savings Plan). Finally, it specifies the rules allowing companies to subscribe with an insurance company for a retirement contract managed under European approval for a “supplementary professional pension”.

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