06 January 2012

ICMA response to ESMA's technical advice on possible delegated acts concerning the Prospectus Directive as amended by Directive 2010/73/EU

ICMA is responding in relation to its primary market constituency that lead-manages syndicated debt securities issues throughout Europe. This constituency deliberates principally through ICMA's Primary Market Practices Sub-committee.

Retail cascades – concept and availability of data

It seems from the consultation that ESMA considers "retail cascade" offers to mean, effectively, indirect offers by issuers via distributors they have "appointed" in some way. This is not so. Retail cascades have generally involved independent offers beyond issuers' control and knowledge (though generally expected and often hoped for). Issuers have recently become involved to an extent in cascade offers because the Prospectus Directive (PD) regime compelled them to do so (in terms of supplementing and passporting their prospectuses). This preceded establishment of the Markets in Financial Instruments Directive (MiFID) regime, which now governs intermediary conduct of business. Intermediary-level disclosure (such as individual intermediaries' standard terms of business that can run into dozens of pages each) should be regulated via MiFID and not via the PD. These aspects are further discussed below, notably in response to Q.2 distinguishing further between:

• single indirect "harmonised" retail offerings (indirect offerings organised by issuers);
• "pure" retail cascade offers (offerings wholly independent of issuers); and
• PD "restricted" retail cascade offers (offerings generally independent of issuers, but covered by their PD-approved prospectuses).

ICMA is only aware of some anecdotal feedback on current practice regarding retail cascades. This is because of the relatively low level of issuance made available to retail investors in the EU (though this may change to an extent with the current turbulence in the institutional markets) and the "national" nature of most such issuance (both partly as a result of the PD regime). The "national" nature of most such issuance in turn complicates matters, because of national market commercial traditions/preferences and some national differences in PD regime interpretation. Responses to ESMA's questions therefore have to be on a qualitative rather than a quantitative basis.

Purpose of a prospectus

A prospectus has several overlapping purposes – namely:

(a) to help an issuer market its debt securities issue, by conveniently disclosing (i) the terms of such securities once issued and (ii) the issuer’s financial and business prospects (and so its likelihood of being able to abide by such terms); some very limited indication of how the securities can be acquired might also be separately given, depending on how the securities are to be marketed;

(b) in so doing, to eliminate any information asymmetry between the issuer and prospective investors in relation to their investment decision, by requiring the prospectus to include all material information known by the issuer (with liability for loss caused by error or omission); and

(c) to serve as a point of reference for logistical information during the subsequent life of the debt securities.

Supplement mechanics

Under the PD, supplements can, and usually do, operate differently in relation to a standalone prospectus and a base prospectus.

A "standalone" prospectus is approved and published in relation to a specific offer (or series of offers) and/or application for a specific admission to trading on an EU regulated market. Any supplement will therefore necessarily be published in relation to offers/applications that are already underway and for which offer acceptance withdrawal rights are therefore likely to be relevant. This will indeed be required further to a “significant new factor, material mistake or inaccuracy relating to the information included in the prospectus” under the PD. It is an undesired, and so hopefully minority, scenario.

The same may equally apply in the context of an offer/application pursuant to a base prospectus, generally once the relevant final terms have been filed with the home (and any relevant host) competent authorities – this being a similarly minority scenario. However, base prospectuses are also supplemented, during their 12-month validity period, ahead of launching any specific offers/applications, so as to bring them to the same "starting point" as a standalone prospectus on its approval – this being a planned and frequent scenario. In this case, withdrawal rights are generally irrelevant as such supplements will be hopefully timed such that there are no pending offers. An ability to publish issue-specific supplements is crucial in this respect.

The PD requires “significant” new information to be mentioned in a supplement. It does not, however, prohibit other information from being mentioned in a supplement. As issuers face liability if significant information is not mentioned in a supplement, then they have to be allowed full discretion to decide what information is to be mentioned in a supplement.

Grandfathering

Whatever approach to the substance of the consultation topics is ultimately advised by ESMA (and then potentially followed in the legislative process), sufficient advance notice will be needed as to what any new provisions shall be and when they will start applying to new issuance of securities – be it in the standalone or base prospectus contexts.

Full consultation paper

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