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:

  1. 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 or activities from all or part of the law's provisions.

    The committee recommends that certain easements be given for activities involving basket certificates, in order for such activity to be allowed to continue at a minimal cost, so long as such certificates comply with the provisions to be established regarding maximum exposure with respect to the value of their assets and regarding transparency, including the appointment of a market maker and the daily publication of the fair value of the certificate. The committee also recommends an easing of the requirements to be imposed on companies that operate without active management of their assets (such as structured deposits) since the purpose of the Joint Investment Trusts Law is to supervise the manner in which the funds are managed. Regarding these companies, the committee recommends that it would be sufficient to impose a duty to disclose the market value continuously over the course of the day and a duty to disclose the assets' rating.

    The law will not apply to entities that are regulated in another framework (banks, insurance companies, etc.) or to companies that offer securities only to sophisticated investors (such as hedge funds) or to "real" companies (whose area of activity is not finance). The committee recommends that the definition of a company trading in financial assets as an "investment company" should be based on the manner in which the company presents itself to the public, on its past operations, the source of its income and of its profits, and on the composition of its assets.

  2. Organization of the legislation applicable to financial brokers – The committee has found that in recent years advanced and complex financial products have been marketed to the general public, while in the United States and Europe, such products are distributed to the general public only in a very limited manner. It is therefore proposed that complex financial products be classified and distinguished from regular financial products. The complex products group will include complex basket certificates, credit derivatives, securities that are priced in a manner requiring special financial skill, and others. It is proposed that in the context of the labeling of the financial products, for example, only a product which guarantees the return of principal may be labeled as a "debenture."

    A duty will be imposed on financial brokers – to provide consultation regarding specific complex products and to examine such products with respect to their appropriateness for a client, with neither the client nor the broker being entitled to waive this stage of consulting whenever the customer is not a sophisticated investor.

 

The Banks Commissioner has recently published a price list for the banks, which will be given shape in the context of the reform of bank fees

Pursuant to an amendment to the Banking (Service to Customers) Law - 1981 ("the Banking Law"), which was enacted in July of 2007, the Governor of the Bank of Israel may establish a list of services for which a bank may charge its customers with fees, and may determine the manner in which such fees are to be calculated and how they may be presented. A structured and uniform presentation of fees is intended to insure transparency and the customers' ability to make comparisons among banks. The Banking Law prohibits the collection of a fee for a service which is not included in the price list established by the Governor (unless the Governor has permitted the bank to add a specific fee). This prohibition will enter into force in January of 2008.

The new price list published by the Banks Commissioner refers to general banking services for private customers and small businesses, and does not include special services such as foreign commerce and futures contracts. According to the Banking Law, the Governor may establish, in addition to the full price list, more limited price lists for various categories of banking services or various categories of customers.

In the context of the published price list, the number of permitted fees was consolidated and reduced to only 68 types of fees, out of 198 fees that are currently in place. Thus for example, 15 different fees related to the ongoing activities of a current account have been consolidated into only two fees: internet transactions and transactions carried out through bank clerks.

 

The Bank of Israel will continue to publish the dollar's representative exchange rate

In April of 2007, the Bank of Israel began to examine the possibility of discontinuing the publication of the representative exchange rate, in order to encourage the market to set prices in shekel amounts, and it asked for public comment regarding the issue. The Bank of Israel has recently decided to continue to publish the representative exchange rate, as had been done until now.

 

A Comparison of Israel to the OECD countries, based on financial stability indicators, indicates that Israel must continue to improve in order reach the average for OECD countries

The comparison was carried out according to banking system stability indicators published by the International Monetary Fund. The comparison reveals that Israel has improved since 2005 with respect to capital adequacy criteria (the amount of equity capital required for a bank's stability, which is established on the basis of a weighting of the bank's assets according to risk levels) and with respect to problematic debts. Thus for example, the capital adequacy ratio in Israel was 10.8% as compared to 10.7% in 2005, while the average for OECD countries in 2005 was 12.2%. It should be noted that according to the Bank Commissioner's proper management guidelines, Israeli banking corporations are currently required to maintain a capital adequacy ratio of only 9%.

 

New Case Law

A court has ruled: A stock exchange member is not responsible for transactions carried out by an investment portfolio manager holding a power of attorney from an investor, with respect to an account which is maintained at the stock exchange member, and there is no economic logic in imposing a duty on stock exchange members to examine the transactions carried out by investment portfolio managers.

A stock market investor cannot carry out transactions directly on the stock market and must do so with the assistance of a "stock exchange member" (there are currently 28 such stock exchange members) which carries out the transactions on the exchange. A lawsuit was brought against a stock exchange member, alleging, inter alia, that the stock exchange member had provided the plaintiff with unreasonable amounts of credit and that the stock exchange member was responsible for the execution of "churning" transactions (transactions which involve the purchase and sale of securities over short time spans, with the purpose of charging the customer with commissions). At the time that the plaintiff contracted with the investment portfolio manager and granted a power of attorney, the plaintiff had also signed a document releasing the stock exchange member from liability for transactions carried out in the investment portfolio, and which confirmed that the plaintiff was aware that the portfolio would be managed independently by the investment portfolio manager and/or by the plaintiff. The plaintiff had also signed a request to have the investment portfolio be managed at a high level of risk. The court held that the relationship between the parties required the stock exchange member to act in accordance with the investment portfolio manager's instructions, and that there was no economic logic in the imposition of a duty on stock exchange members to examine the transactions carried out by investment portfolio managers. It was also held that the plaintiff had not met the burden of proof required for establishing that the stock exchange member had engaged in any activity in violation of the stock exchange rules. Civil Case (Magistrate's Court) (Tel Aviv) 60815/03, Samish v. Moritz and Tubler Ltd. (Yashir Investment House Ltd.)

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