Overview (October 2003) - International Law Office

Clearance and Settlement System
New Investor Guide
Internal Regime Regulation
Regulation on Preferred Securities

Clearance and Settlement System

The Law for Measures to Reform the Spanish Financial System (44/2002) created the Securities Registry, Clearance and Settlement Systems Management Company (Iberclear). As of April 1 2003 Iberclear is the central securities depository for Spain.

Iberclear was created through a merger between the Clearance and Settlement System of the Spanish Stock Exchanges and the Spanish Central Public Debt Registration, which was managed by the Bank of Spain.

Iberclear is part of the holding company Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financeros SA. This company integrates the Spanish fixed income markets, stock exchanges, derivatives markets, and clearance and settlement systems.

As central securities depository in the dematerialized securities market, Iberclear is in charge of (i) the Central Registry of Securities represented through book entry form or through electronic form, and (ii) the clearance and settlement of transactions. Iberclear manages two different systems (technological platforms) of clearance and settlement, one for stock exchange transactions and one for public debt market transactions.

Iberclear is in charge of the registration, clearance and settlement of transactions carried out in the following Spanish markets:

• the Madrid, Barcelona, Bilbao and Valencia stock exchanges;
  
  
• the Latin American Stock Exchange;
  
  
• the Association of Fixed-Income Securities Dealers Fixed-Income Market; and
  
  
• the public debt market.

New Investor Guide

Due to the growing complexity of the investment products marketed by financial entities, especially those marketed to retail investors, in June 2003 the Spanish National Securities Commission approved a new guide containing principles and recommendations for the transmission of information to investors, which financial entities must approve.

The guide is aimed at all entities which commercialize investment products such as shares, bonds, preferred securities and investment funds, and establishes certain rules governing the quality of the information that is transmitted by financial entities to retail investors.

The main contents of the guide may be summarized as follows:

• All financial entities wishing to commercialize investment products that are supervised by the commission must approve a written procedure manual for the transmission of information to investors. The manual must, among other things, describe the existing channels of information, and the terms and content of information that is to be delivered to retail investors.
  
  
• Each financial entity must create a new department or designate a compatible existing department to (i) clarify and review the procedure manual, (ii) appoint the relevant persons in charge of the implementation of the manual, and (iii) appoint the department responsible for supervision of and compliance with the manual.
  
  
• One of the main purposes of the manual is to prevent financial entities from offering, except in cases where it is expressly required, investment products that do not meet the client's risk profile. In this regard, the procedure manual must contain criteria permitting the establishment of different client categories in relation to the risk levels of the securities to be offered.
  
  
• The procedure manual must include the preparation of an annual report which will detail any incidents that occurred during the year.

Internal Regime Regulation

Under Article 14 of the Securities Market Law (24/1988) the board of the National Securities Commission is obliged to approve a regulation outlining the commission's structure and the distribution of competencies among the commission's bodies. On July 10 2003 the board duly approved one such regulation.

The Internal Regime Regulation contains 59 articles divided into eight chapters. The introductory chapter explains the general dispositions that govern the commission's internal regime as follows:

• The commitments of the commission, as defined in Chapter 2, are (i) the supervision of the securities markets, (ii) the supervision and inspection of the activities of all entities and persons involved in the securities markets, and (iii) the imposition of penalties on entities and individuals that breach securities market regulations;
  
  
• The managing bodies of the commission and its functions are described in Chapters 3, 4 and 5. The managing bodies are the board, the president, the vice president (both the president and vice president are appointed by the government) and the executive committee; and
  
  
• The board is composed of the president, the vice president, the secretary of treasury and financial policy, the vice governor of the Bank of Spain and three directors appointed by the Ministry of Finance.

There are three bodies under the president's supervision:

• the Entities General Directorate, which is entrusted with the authorization and supervision of investment services entities, collective investment institutions and venture capital entities;
  
  
• the Markets and Investors General Directorate, in charge of files on (i) issues of securities, public offers of securities, listings of securities on the stock exchanges and public tender offers, (ii) control of relevant ownership of shares communications in listed companies, (iii) control of the relevant information submitted by listed companies, and (iv) suspensions of listings; and
  
  
• the Legal Affairs General Directorate, in charge of drafting the commission's circulars.

The regulation also contains provisions on administrative procedure, employee selection and the commission's budget.

Regulation on Preferred Securities

On July 6 2003 the Law on Foreign Capital Transfers and Financial Transactions and on Certain Measures to Prevent Money Laundering (19/2003) was enacted. It creates a new Second Additional Disposition to the Law on Investment Ratios, Capital Adequacy and Information Requirements for Financial Intermediaries (13/1985). The new disposition establishes, for the first time, rules governing the issue of preferred securities by Spanish credit entities directly or indirectly through a credit entity group subsidiary incorporated in an EU member state (other than tax havens, as defined in Royal Decree 1080/1991), the sole corporate purpose of which is the issue of preferred securities. The voting rights in the subsidiary must be held by the Spanish credit entity.

In order to benefit from a favourable tax regime the issue of preferred securities must comply with certain requirements, which may be summarized as follows:

• The holders of preferred securities will receive non-cumulative remuneration subject to the existence of distributable profit by the Spanish credit entity;
  
  
• The preferred securities, except in certain circumstances, will not carry voting rights;
  
  
• The holders of preferred securities will not have pre-emptive rights in further issues of preferred securities;
  
  
• The preferred securities will be perpetual. However, the preferred securities may be subject to early redemption by the issuer, with the prior authorization of the Bank of Spain;
  
  
• The preferred securities must be listed on a secondary market;
  
  
• In the event of the liquidation or dissolution of the issuer, the preferred shareholders will only be entitled to reimbursement of the nominal value of the securities, increased by any remuneration accrued but not yet paid; and
  
  
• At the time the preferred securities are issued, the outstanding nominal amount of the preferred securities must not be higher than 30% of the consolidated equity of the credit entity group.

In addition to credit entities, this regime may also be applicable to listed companies.

For further information on this topic please contact Javier Ybáñez at Garrigues Abogados & Asesores Tributarios by telephone (+34 91 514 52 00) or by fax (+34 91 399 24 08) or by email (javier.ybanez@garrigues.com).