Banking & Financial Newsletter - The Legislative Regulation Of The Activities Of Companies That Trade Financial Assets

Author:Mr Gadi Ouzan
Profession:Shibolet & Co.
 
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The Israel Securities Authority proposes the legislative

regulation of the activities of companies that trade financial

assets such as basket certificates and structured deposits, and

that such companies be subjected to the provisions of the Joint

Investment Trusts Law

In recent years, there has been an increase in the activity of

companies whose shares are traded on the Israeli stock exchange and

whose main activity is the trading of securities and financial

products. Most of this activity involves the trading of basket

certificates, a sector in which the assets total tens of billions

of shekels, but also involves other financial products such as

securitized deposits and corporate debentures, structured deposits

and others.

A significant portion of this activity is carried out through

private companies that have issued debentures on the stock exchange

and are subject only to the disclosure requirements that the

Securities Law, 1968 (the "Securities

Law"), imposes on reporting entities, and they are

not subject to the provisions of the Joint Investments Trusts Law,

1994 (the "Joint Investment Trusts

Law"), since they are not incorporated as

"mutual funds." This is why the Israel Securities

Authority wishes to determine what is the appropriate regulatory

framework for the supervision of the activities of such companies,

which frequently expose the investing public to complex financial

products that lack transparency and involve a high degree of risk.

The Authority's position is that the Securities Law provisions

are more appropriate for real companies, and less appropriate for

companies that trade financial assets.

An inter-ministerial committee appointed by the Authority's

Chairman, Moshe Tery, has submitted its recommendations, which are

divided generally into two aspects:

Arrangement of the regulatory framework to apply to

companies that trade financial assets, through a substantive test

regarding the manner of their operations – It has

been proposed that the Joint Investment Trusts Law be amended so

that it would apply to companies whose purpose is joint investment,

holding, ownership or trading of securities, even if such companies

are not incorporated as mutual funds. The definition of a security

will be changed such that it will also include options, futures

contracts, derivatives and participation certificates and "any

economic interest in a security" (a basket clause which is

subject to purposive interpretation). The Israel Securities

Authority will have the power to exempt specific entities...

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