French Financial Institutions Litigation & Regulation Update, Iss. 8
LEGISLATION AND REGULATION
FIRST STEP TO IMPLEMENTATION OF SOLVENCY II DIRECTIVE INTO FRENCH LAW
As previously reported, legislation had mandated the government to implement a number of EU directives. Among these directives was Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) as subsequently revised.
To this effect, Ordonnance no. 2015-378 was taken on April 2, 2015. The Ordonnance refers to upcoming secondary legislation on a number of issues (governance, groups provisions, to name but a few).
New provisions are due to take effect on January 1, 2016.
SECONDARY LEGISLATION REQUIRES THAT SIGNIFICANT CASH PAYMENTS OR CASH WITHDRAWALS BE REPORTED TO FRENCH ANTI-MONEY LAUNDERING UNIT
Recent legislation requires bankers to report to French anti-money laundering unit TRACFIN cash payments and cash withdrawals made on a deposit account or a payment account in excess of amounts to be determined by way of secondary legislation. On this basis, cash payments and cash withdrawals in excess of EUR 10,000 per calendar month will need to be reported as a result of Decree no. 2015-324 of March 23, 2015.
The Decree is due to take effect on January 1, 2016.
POSITIONS AND GUIDANCE FROM AUTHORITIES
EURONEXT LAUNCHES PRIVATE PLACEMENT BOND
On February 17, 2015, the AMF (which has regulatory authority to approve changes of Euronext’s rules) approved changes to the rules of the French market operated by Euronext for midmarket companies, i.e. Alternext.
Changes consist of new rules for issuers that seek to list on Alternext bonds issued by way of private placement (hence exempt from prospectus requirements). In essence, such issuers will be required to issue at least EUR 200,000 on the trading date for standalone issues on the basis of an offering memorandum. Issuers will not be required to appoint a Euronext-approved listing sponsor to prepare the listing and assist them throughout their life as a listed company. Issuers will not be required to publish an annual report and will not be required to publish their accounts in IFRS standards.
FRENCH CONSTITUTIONAL COURT RULES THAT STOCK MARKET OFFENSES MAY NOT GIVE RISE TO BOTH ADMINISTRATIVE SANCTIONS AND CRIMINAL COURT SANCTIONS
As reported in our Alert, the French Constitutional Court (Conseil constitutionnel) ruled on March 18, 2015 that the imposition of both administrative sanctions by the enforcement body of the securities regulator (Commission des sanctions de l’Autorité des marchés financiers) and criminal sanctions by criminal courts (Tribunaux correctionnels) for insider dealing is in breach of French constitutional rules.
Whether this dual enforcement could subsist had been a matter of increasing doubt since the decision Grande Stevens v Italy held on March, 4, 2014 by the European Court of Human Rights. The court had ruled that the Italian enforcement of market manipulation, whereby the same conduct may give rise to both criminal prosecution and administrative enforcement action, was a breach of the principle of “ne bis in idem,” stating that none may be judged twice for the same conduct. Although held in the context of market manipulation enforcement in Italy, this decision could have equally been held in a French context, which, similarly to Italy, foresees a dual enforcement for stock market offenses.
The rationale of the French Constitutional Court is fourfold. First, the two sets of rules (administrative and criminal) are actually targeted against the same conduct. Second, the two proceedings both fulfill the same function, i.e., the proper functioning and the integrity of the market. Third, the nature and severity of administrative sanctions, on the one hand, and criminal sanctions, on the other hand, do not set them apart. And four, both sanctions may be held by the same class of courts (judicial as opposed to administrative) subject to some exceptions.
The ruling marks a change from previous case law that held that criminal enforcement could be combined with enforcement by the market authority to the extent that these two sanctions differed in nature, the former being criminal and the latter being administrative.
The consequences of the ruling are as follows:
- Where administrative charges have been dismissed against a defendant without recourse for appeal, criminal charges for the same conduct will need to be dropped. Where criminal charges have been dismissed against a defendant without recourse for appeal, administrative charges for the same conduct will need to be dropped.
- Effects of the ruling are postponed to September 1, 2016, meaning that until that date, where two proceedings (either before the AMF or criminal courts) have been initiated and are still pending, the enforcement that has been initiated first will be the only one allowed to be pursued, i.e., where the AMF has opened investigations, criminal courts will no longer be allowed to take action and the other way around.
French authorities are considering amending current legislation to make French law compatible with this ruling, while finding a way to accommodate European legislation (Market Abuse Regulation and Directive), which requires stock market offenses to be criminally sanctioned.
JUDICIAL SUPREME COURT RULES IN THE CONTEXT OF HEDGING TRANSACTIONS ENTERED INTO BY PROFESSIONAL CLIENT THAT INVESTMENT BANK IS NOT BOUND BY A DUTY TO ADVISE COUNTERPARTY AND IS NOT REQUIRED TO WARN COUNTERPARTY AGAINST POTENTIAL RISK AND TO DISCLOSE ITS REMUNERATION
In a case dated March 17, 2015, the French Judicial Supreme Court (Cour de cassation) overturned a decision from the Paris Court of Appeal in a matter involving a dispute over several contracts entered into by a nickel producer and an investment bank in order to hedge the risk arising from the potential fall of nickel prices.
The Paris Court of Appeal had rejected the nickel producer’s claim for annulment of the hedging agreements. However, the Court of Appeal had considered that the bank was liable for failing to provide information in relation to possible options to close out the hedging products, certain features that may have affected the nickel producer’s positions on the market and the bank’s remuneration. Moreover, the Court of Appeal found that the bank had failed to fulfill a duty to provide advice to the nickel producer since the products were not suitable for its needs.
The French Supreme Court overturned the Court of Appeal’s decision. As the hedging products were not speculative in nature, the investment bank had no obligation to warn the nickel producer about the intricacies of the transactions and potential financial loss. The Supreme Court added that, generally, the investment bank involved in zero-cost hedging transactions does not have a duty to disclose information in respect of its remuneration.
ADMINISTRATIVE SUPREME COURT CONFIRMS SANCTION AGAINST FUNDS DEPOSITARY
In a decision dated 25 February, 2015, the French administrative Supreme Court (Conseil d’état) confirmed a decision from the AMF Enforcement Committee against a depositary. In 2013, the AMF Enforcement Committee had levied a EUR 500,000 sanction against a funds depositary for control deficiencies resulting from a lack of sufficient material and human resources. The depositary appealed against this decision, considering the AMF Enforcement Committee had exceeded its powers and violated the principle of legality of criminal offences and penalties. The French administrative Supreme Court rejected the depositary's claim and ruled that the requirements from this principle, applied outside the criminal law, were satisfied solely by a reference to the legal and regulatory obligations of the depositary.
RECENT DECISIONS FROM AMF ENFORCEMENT COMMITTEE ADDRESS FINANCIAL COMMUNICATION BY LISTED COMPANIES FOCUSING ON EQUAL ACCESS TO INFORMATION BETWEEN ANALYSTS AND INVESTORS
Two recent decisions from the AMF Enforcement Committee dated December 18, 2014 and March 3, 2015 addressed the issue of equal access to information between analysts and investors.
These two decisions illustrate that guidance of financial analysts is permissible when it helps analysts understand the data supplied to investors. By contrast, guidance of analysts should not result in the provision of inside information not accessible to investors. This was allegedly the case in one of the two decisions, where investors had been advised that the operating margin of the company was purported to be within a given range, and analysts were subsequently told in an analysts call that the figure would be on the low side of the range. On the basis that the company could not prove that materials used during the analysts call had been made available to the public through the company’s website, it was judged that equal access to information between analysts and investors had not been complied with. On the other hand, where materials used during the analysts call are made available to the public, the principle of equal access to information between analysts and investors should be deemed to be complied with.
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