ESMA advises European Commission on Prospectus Directive's overhaul

01 March 2012

In its advice, ESMA proposes how to use a prospectus in a retail cascade, and provides input on how to review the provisions of the Prospectus Regulation concerning tax information, indices, auditor's report on profit forecasts and estimates, and audited historical financial information.

ESMA published today the second part of its final advice (ESMA/2012/137) on possible delegated acts for the Prospectus Directive (PD). The advice was submitted to the Commission on 29 February, 2012. The advice follows a public consultation started on 13 December, 2011.

Overall, the technical advice aims to achieve a high level of investor protection and to increase across Europe the legal clarity and efficiency of the prospectus regime. Investment prospectuses as such are aimed at providing investors with easily-accessible information on financial products so as to foster informed decision-making.

Increased transparency in retail cascades

ESMA observed that there is no uniform model of retail cascades within the European financial markets and therefore concludes, with a view to increasing transparency, legal certainty, investor protection and the supervisory needs of competent authorities, that the consent to use a prospectus needs to be included in the prospectus or base prospectus/final terms.

In order to take into account the current market practices where the issuer’s ability to identify all financial intermediaries in the prospectus or final terms might be limited, ESMA proposes a two type consent approach, setting out principles which need to be respected by issuers or persons responsible for the drawing up the prospectus and financial intermediaries, as well as specifying the minimum content of the general consent and any conditions attached thereto.

• Tax regime: As investors may be deprived of tax information in certain jurisdictions where an issuer is actively making a public offer, ESMA proposes to keep the current requirement of the PD but revise its FAQ to reflect that such information shall be included in the prospectus.
• Indices: ESMA is of the view that, among all indices, there is a clear conflict of interest in the case of proprietary indices. Although disclosure on conflicts of interest is already required, a description of the index in the prospectus would provide additional transparency on the issue, ensure that the respective competent authorities have the possibility to scrutinize the description, and ensure comprehensibility of the prospectus. The description is required if the index is composed by the issuer and/or any entity belonging to the same group as the issuer.
• Auditor’s report on profit forecasts and estimates: ESMA proposes to keep the current requirement of an auditor’s report on profit forecasts and estimates, as it believes that reports prepared by independent accountants or auditors provide investors with confidence and ensure a certain quality of the profit forecasts or estimates being prepared on the basis of the underlying assumptions.
• Audited historical financial information:  ESMA proposes to keep the current regime of including three years of audited historical financial information. A reduction of the disclosure requirement would result in less extensive information on which an investor can base the relevant investment decision.

Background and next steps

On 20 January 2011, ESMA received a mandate from the Commission to provide technical advice on possible delegated acts concerning the PD as amended by the Amending Prospectus Directive. The Mandate was split into three parts as regards the prioritisation of work and delivery of the technical advice. The first part was delivered on 4 October, 2011.

ESMA will start the work on the remaining part of the mandate which covers a comparative table recording the liability regimes applied by the Member States; the work on equivalence of third-country financial markets is postponed due to the on-going review of the Transparency, Market Abuse and MiFID. Finally, the disclosure requirements for convertible bonds will be dealt with under the same technical advice (Part III of the Mandate). With regards to the areas covered by the ESMA provided on 29 February, the Commission is due to adopt the delegated acts by 1 July 2012.

Full advice

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