i General overview
As the Netherlands is an EU Member State, Dutch capital markets law and regulation is heavily influenced by EU law. EU Directives are implemented in Dutch law, generally in time and without substantial deviation, whereas EU Regulations have direct effect in the Netherlands. Most of the EU Directives relevant to the capital markets (including the Capital Requirements Directive,2 the Prospectus Directive3 and the Transparency Directive)4 have been implemented in the Dutch Financial Supervision Act, which sets out the main licensing and other requirements for participants in the financial markets. Legislative acts, such as the Dutch Financial Supervision Act, are adopted by the Dutch parliament and often delegate the power to stipulate detailed rules to ministers of the government by way of decrees and regulations.
ii Regulatory authorities
The Dutch capital markets are supervised by the Dutch Authority for the Financial Markets (AFM), which focuses on supervision of the financial markets and its participants, and the Dutch Central Bank (DCB), which focuses on the prudential supervision of financial institutions, with certain (intervention) powers reserved to the Minister of Finance. Since the introduction of the EU Banking Union, certain large Dutch credit institutions are under the direct supervision of the European Central Bank regarding prudential matters, whereas other Dutch credit institutions remain under the direct supervision of the DCB (with the European Central Bank conducting indirect supervision through the DCB).
The supervisory authorities may conduct industry-wide or institution-specific investigations and may impose administrative sanctions, including administrative fines and the publication of findings and fines. The authorities may also refer (suspicions of) criminal offences or crimes to the public prosecution service, which may then conduct its own investigation and bring criminal charges through the criminal court system. Where areas of Dutch or EU capital markets law are not clear, the AFM in particular may issue guidance in the form of guidelines applicable to the market generally, or interpretations applicable to a given case. It will generally not provide the latter on a no-names basis.
Ultimately, the Dutch courts interpret and enforce Dutch capital markets law, which may overturn decisions of the supervisory authorities (which they do on occasion).
The Netherlands has a reputation for an independent high-quality and generally efficient court system that operates on the basis of a pragmatic code of civil procedure. Litigation before the courts is based on the principle of party autonomy where, subject to certain exceptions, the jurisdiction of the courts is limited to the claims, arguments and defences submitted to the courts by the relevant parties. Judges play an active role in case management and fact finding. Court proceedings do not allow for US-style 'discovery', with the exception of a few, narrowly defined instances only.
Litigation is generally conducted before the Courts of First Instance, with the possibility of appeal as to both fact and law to the Courts of Appeal, and a further possibility to appeal – on the grounds of law, but not fact – to the Supreme Court of the Netherlands. Dutch courts may refer doubts about the correct interpretation or application of EU law to the EU courts or questions about the correct interpretation or application of Dutch law to the Supreme Court.
For the Dutch equity capital markets in particular, an important specialised court is the Enterprise Chamber of the Amsterdam Court of Appeals, which may, for example, conduct internal investigations in respect of Dutch companies at the initiative of certain shareholders holding a de minimis shareholding, for example in the context of takeover bids.
In recent years, the Netherlands has positioned itself as a hub for the resolution of international civil and commercial disputes, in the fields of both arbitration and litigation. The Netherlands Commercial Court (a division of the Amsterdam courts) is soon to be launched, allowing court proceedings to be conducted in English before the Dutch courts in Amsterdam.
II THE YEAR IN REVIEW
There have been extensive legal and regulatory changes affecting capital market transactions and market participants during 2017 and 2018. Below we describe some of the most significant developments affecting (1) the capital markets generally, (2) the debt capital markets specifically, and (3) the equity capital markets in particular. Our overview will conclude with legal and regulatory developments affecting financial institutions active in the capital markets.
i Developments affecting capital markets generally
In 2018, the European and Dutch capital markets were affected by the entry into force of the Markets in Financial Instruments Directive (MiFID II)5 and the Markets in Financial Instruments Regulation (MiFIR),6 certain elements of the Prospectus Regulation7 and the Benchmarks Regulation.8
MiFID II and MiFIR
A major focus of capital market participants were the changes brought by MiFID II, which affected the licensing of market participants, documentation and capital markets transactions directly in a significant way for years to come.
Product governance – target markets
MiFID II introduced a new product governance regime applicable to firms that manufacture financial instruments (manufacturers) or distribute the same to end investors (distributors), or both.
For the purposes of MiFID II, manufacturers are MiFID firms 'that create, develop, issue and/or design financial instruments, including when advising corporate issuers on the launch of new financial instruments'9 whereas distributors are MiFID firms 'that offer or sell financial instruments and services to clients'.10
As such, any MiFID firm issuing financial instruments may be considered to be a manufacturer. However, the position is less clear in relation to managers and underwriters. Owing to the broad scope of the definitions of the terms manufacturer and distributor, the common view is that, in the context of a typical issuance of debt instruments, the (joint) lead managers involved may qualify as both (co-)manufacturers and distributors, whereas more passive, managers potentially only qualify as distributors (but not as manufacturers). That being said, this is not a hard rule that can be observed in all circumstances. An assessment will always need to be made, for each case, as to who is a manufacturer and who is a distributor (or both) with regard to the activities performed by the relevant managers and underwriters.11
MiFID II requirements applicable to manufacturers
A manufacturer of financial instruments must, among other things:
- identify a target market for the relevant financial instruments, ensuring that the distribution strategy is consistent with the target market and taking reasonable steps to ensure that the financial instruments are distributed to the target market;
- regularly assess whether the relevant financial instrument remains consistent with the needs of the identified target market;
- provide the distributors with information on, among other things, the appropriate distribution channels and the identified target market in order for the distributors to understand and recommend or sell the relevant financial instruments in a proper manner; and
- enter into a written agreement with co-manufacturers (including third-country firms and non-MiFID firms, which perform the same activities as a manufacturer) outlining their mutual responsibilities. A written agreement is typically included in the subscription/underwriting agreement on the basis of industry standards developed by the International Capital Markets Association (ICMA).
MiFID II requirements applicable to distributors
Pursuant to MiFID II, a distributor of financial instruments must, among other things:
- identify its own target market and distribution strategy, using the information obtained from manufacturers and information about their own clients;12 and
- provide the manufacturers with information about sales and, where appropriate, other information that would support the manufacturers in their product review.
As distributors, in practice, rely on information given to them by the manufacturers of the financial instruments when recommending or selling financial instruments, the MiFID II product governance rules are likely to affect a large number of transactions with an EEA nexus – where the financial instruments are to be distributed within the EEA – even where the issuer and entities performing the function of manufacturer are not subject to MiFID II themselves. As such, identifying a target market and forming an appropriate distribution strategy is something that non-EEA firms and issuers will need to take into consideration going forward if there is an intention to reach EEA investors.
In the context of the above, it can be noted the AFM deems a variety of complex financial products as not suitable for marketing to retail clients. For example, contingent convertible securities (CoCos) are deemed not suitable for retail clients, unless on an advised basis.13
Underwriting and placing
MiFID II also introduced additional requirements on MiFID firms underwriting and placing financial instruments, relating to conflicts of interest that may arise between the MiFID firm placing and underwriting financial instruments and its issuer-client.
Conflicts identified in the context of the provision of underwriting and placing services include, among others, the following situations:14 corporate finance advice provided prior to underwriting and placing (which requires adequate prior disclosure of the available financing alternatives), pricing and allocation of financial instruments (which are both subject to policy and transparency requirements), the combination of underwriting and distribution or the existence of a previous credit relationship (with both required to be addressed in conflict of interest policies and being subject to organisational requirements).
Prior to the coming into force of MiFID II, the Netherlands had already introduced an inducement ban prohibiting MiFID firms from paying or receiving inducements (directly or indirectly) in connection with the provision of investment and ancillary services to non-professional investors (subject to limited exceptions),15 meaning that, in general, only direct payment by the non-professional client for the investment services is permitted. The Dutch inducement ban applies to all MiFID firms providing investment or ancillary services in the Netherlands, with the exception of EEA MiFID firms providing such services in the Netherlands solely on a cross-border basis pursuant to the EEA passporting regime, and continues to apply in addition to the MiFID II rules described below.
In addition to the Dutch inducement ban, the enactment of MiFID II has introduced a regime that applies to inducements received by MiFID firms in connection with the provision of all investment services to all types of investors (unlike the Dutch inducement ban, which only applies to investment services provided to non-professional investors). However, the inducement regime does not apply to execution-only investment services provided to eligible counterparties.16 Under the MiFID II inducement regime, MiFID firms are generally prohibited from paying or being paid any fee or commission, or providing or being provided with any non-monetary benefit in the context of the provision of an investment or ancillary service by a party other than to or by the client (or a person acting on behalf of the client).17
An exception applies, however, where the payment or benefit (1) is designed to enhance the quality of the service and (2) does not impair the MiFID firm's duty to act honestly, fairly and professionally in accordance with the best interest of its client.18
Stricter requirements apply where the MiFID firm has informed its client that it is providing independent investment advice and where the MiFID firm is providing the investment service of portfolio management, in which case the MiFID firm is not entitled to receive non-monetary benefits (other than certain minor non-monetary benefits19 that are capable of enhancing the quality of service provided to a client and are disclosed to the client) and may only accept and receive fees, commissions or monetary benefits received from third parties in the context of such services where they are transferred in full to the client as soon as reasonably possible after receipt.20
One significant change introduced by MiFID II is that investment research21 is now expressly considered to be a non-monetary benefit (even where there is no clear inducement possibility, because, for example, the provider of the investment research does not offer any execution services). This has had a significant impact on MiFID firms providing portfolio management services and independent investment advice, given that such firms are, in principle, not allowed to receive non-monetary benefits, except under very limited circumstances as described above. Under MiFID II, investment research shall not be considered a prohibited inducement, however, where (1) the investment research is paid by the MiFID firm out of its own resources or (2) where the investment research is paid for from a separate research payment account controlled by the MiFID firm,22 provided that certain conditions regarding the operation of the account are met.23
In practice, many large portfolio managers have opted to absorb the costs of investment research themselves although no uniform practice throughout Europe can be discerned at this moment. For example, various large portfolio managers have also opted to set up a research payment account or have opted to pay for research through a combination of both a research payment account and their own resources.
The Prospectus Regulation
The Prospectus Regulation was published in the Official Journal of the European Union on 30 June 2017, entering into force on 20 July 2017. While the bulk of the provisions of the new Regulation will apply from 21 July 2019, certain provisions had direct effect earlier, expanding the scope of certain exceptions to the obligation to publish a prospectus.
Revisions to exceptions to the obligation to publish a prospectus
Under the Prospectus Regulation, the obligation to publish a prospectus is still triggered when securities are offered to the public or admitted to trading on a regulated market situated or operating within an EEA Member State. However, certain exceptions to this obligation already existed under the Prospectus Directive, some of which have been expanded or restricted under the Prospectus Regulation.
As of 20 July 2017, the requirement to publish a prospectus does not apply to the admission to trading on a regulated market of securities fungible with securities already admitted to trading on the same regulated market, provided that the securities represent, over a period of 12 months, less than 20 per cent of the number of securities already admitted to trading on the same regulated market.24 (This exception is up from 10 per cent under the equivalent exception under the Prospectus Directive.) In addition, contrary to the equivalent exception under the Prospectus Directive, the exception under the Prospectus Regulation applies to all securities and not only to shares, meaning that tap issues for listed notes (that are not being offered to the public) may now benefit from the exception, provided that the issuer remains compliant with the aforementioned 20 per cent limit.
As of 20 July 2017, additional restrictions are imposed on the exception to the obligation to publish a prospectus for admission to trading on a regulated market in connection with shares resulting from the conversion or exchange of other securities or from the exercise of the rights conferred by other securities. Under the Prospectus Directive, this conversion exception was not subject to any sort of quantitative limit, whereas under the Prospectus Regulation, the exception only applies where the resulting shares represent, over a period of 12 months, less than 20 per cent of the number of shares of the same class already admitted to trading on the same regulated market (subject to certain exceptions, notably (1) where a prospectus was published for the securities that had been converted and (2) where the conversion shares qualify as certain types of capital instruments under the Capital Requirements Regulation25 or the Solvency II Directive26).27
Small offers of securities
As of 21 July 2018, the Prospectus Regulation prescribes that the Prospectus Regulation shall not apply an offer of securities to the public with a total consideration in the EEA of less than €1 million, which shall be calculated over a period of 12 months.28 In addition, the new Regulation provides for the option of allowing Member States, at their discretion, to exempt offers in the EEA of up to €8 million over a period of 12 months. The Dutch legislator has made use of this Member State option, setting the maximum amount at €5 million (up from €2.5 million), meaning that offers of securities to the public with a total consideration in the EEA of less than €5 million over the last 12 months does not require the publication of a prospectus under Dutch law. For the purposes of calculating the maximum amount, the offerings of the issuer and its affiliates shall be aggregated.
For offerors to make use of this exception, Dutch law prescribes that the offeror must notify the AFM of the offering prior to its commencement and simultaneously provide the AFM with (1) certain information regarding the issuer, the offeror and the offering, and (2) an information document in the form prescribed by law.29 In addition, if the offer is not solely made to qualified investors, additional standard exemption disclosure language is required to be included in documents regarding the offering for offerors to make use of this exception.
The Benchmarks Regulation
In the wake of various benchmarks-related scandals, the Benchmarks Regulation was introduced in 2016, with the majority of the provisions applying from 1 January 2018 onwards (subject to certain transitional provisions that apply until 1 January 2020). It applies to (1) the provision of benchmarks, (2) the contribution of input data to a benchmark and (3) the use of a benchmark, within the EEA.
The key term is 'benchmarks', which for the purposes of the Benchmarks Regulation is defined as:
- any index30 by reference to which:
- the amount payable under, or the value of, a financial instrument, for which a request has been made for admission to trading, or which is traded, on a regulated market, multilateral trading facility (MTF) or organised trading facility (OTF), or which is traded via a systematic internaliser;31 or
- the amount payable under a consumer credit agreement within the scope of the Consumer Credit Directive32 or a consumer credit agreement relating to residential immovable property within the scope of the Mortgage Credit Directive33 (each being a financial contract as defined in the Benchmarks Regulation);
is determined; or
- an index that is used to measure the performance of an investment fund, an alternative investment fund or an undertaking for the collective investment of transferable securities (UCITS) with the purpose of tracking the return of the index or of defining the asset allocation of a portfolio or of computing the performance fees.34
For the purposes of the Benchmarks Regulation, benchmarks are further divided into critical, significant and non-significant benchmarks. The type of benchmark determines, for example, the regulatory framework within which the administrator must operate: the administrators of non-significant benchmarks are subject to fewer mandatory provisions of the Benchmarks Regulation than administrators of critical and significant benchmarks. The Benchmarks Regulation also provides for certain provisions to ensure the continuity of certain critical benchmarks (such as EURIBOR, EONIA and LIBOR),35 going as far as to enable competent authorities to require the mandatory administration of such benchmarks where the relevant administrator intends to cease the administration thereof or, where a competent authority believes that the representativeness of a critical benchmark is put at risk, require supervised entities36 (such as credit institutions, investment firms and certain investment funds and investment fund management companies) to contribute input data to the critical benchmark (regardless of whether the supervised entity has previously provided input data to the benchmark, or not).
Provision of benchmarks
The Benchmarks Regulation governs the provision of benchmarks, which is defined as (1) administering the arrangements for determining a benchmark, (2) collecting, analysing or processing input data for the purpose of determining a benchmark and (3) determining a benchmark through the application of a formula or other method of calculation or by an assessment of input data provided for that purpose.37
Any person who has control over the provision of a benchmark is considered an administrator for the purposes of the Benchmarks Regulation.38 This includes parties such as ICE Benchmark Administration Limited in relation to LIBOR and the European Money Markets Institute in relation to EURIBOR and EONIA. Administrators are subject to various transparency, governance and conflicts of interest requirements under the Benchmarks Regulation and will need to be authorised by the competent authority of the Member State where the person is located (or in the case of the (intended) provision of (1) non-significant benchmarks or (2) non-critical benchmarks (provided by supervised entities other than administrators) registered with the competent authority. The names of the administrators so authorised or registered will be included in a register for benchmarks and administrators maintained by the European Securities and Markets Authority (ESMA) pursuant to Article 36 of the Benchmarks Regulation.
A provider of a benchmark that is not located in the EEA is, in principle, not bound by the provisions of the Benchmarks Regulation. However, subject to the transitional provisions of the Benchmarks Regulation, supervised entities will only be able to use the benchmarks (including non-EEA benchmarks) provided by the non-EEA person within the EEA if the person and the benchmark are included in the register maintained by ESMA as referred to above, or, pending an equivalence decision by the European Commission, the benchmark has been recognised by the relevant competent authority in the Member State of reference in accordance with the Benchmarks Regulation.39 Alternatively, an EEA administrator may request to endorse a non-EEA benchmark to make it available for use by supervised entities within the EEA.40
Contribution of input data to a benchmark
The Benchmarks Regulation governs the contribution of input data to a benchmark, which is defined as the provision of any input data not readily available to an administrator (or to another person for the purposes of passing to an administrator) that is required in connection with the determination of a benchmark and is provided for that purpose.41
The Benchmarks Regulation requires administrators to prepare a code of conduct regarding the provision of input data – specifying, among other things, the contributor's responsibility in relation to the input data it provides – and administrators are required to satisfy themselves (continuously) that contributors comply with the code of conduct.42 However, direct obligations are imposed on supervised contributors (i.e., supervised entities that contribute input data to an administrator located in the EEA) under the Benchmarks Regulation, making them, among other things, subject to adequate governance and control requirements, specifically to avoid conflicts of interest.43
Use of a benchmark
The Benchmarks Regulation governs the use of benchmarks, which is defined as:44
- the issuance of a financial instrument that references an index or a combination of indices;
- the determination of the amount payable under a financial instrument or financial contract by referencing an index or combination of indices;
- being party to a financial contract that references an index or combination of indices;
- the provision of a borrowing rate calculated as a spread or mark-up over an index or a combination of indices and that is solely used as a reference for a financial contract; or
- the determination of the performance of an investment fund through an index or combination of indices for the purpose of tracking the return of the index or combination of indices, of defining the asset allocation of a portfolio or of computing the performance fees.45
Pursuant to the Benchmarks Regulation, supervised entities may only use benchmarks that are (1) provided by EEA administrators that are included in the register of benchmarks and administrators maintained by ESMA or (2) included in the aforementioned register. However, certain transitional provisions apply, pursuant to which supervised entities may continue to use existing benchmarks (as used prior to 1 January 2018 (the date of application of the Benchmarks Regulation)) provided by non-registered or authorised EEA administrators, respectively benchmarks that are not included in the aforementioned register:
- in the case of benchmarks provided by EEA index providers: until (1) 1 January 2020 or (2) where the index provider submits an application for authorisation or registration, unless and until authorisation or registration is refused; and
- in the case of benchmarks provided by non-EAA index providers: as a reference for financial instruments, financial contracts, or for measuring the performance of an investment fund that already references the benchmark in the EEA, or that add a reference to benchmarks prior to 1 January 2020, unless the European Commission has adopted an equivalence decision or unless an administrator has been recognised, or a benchmark has been endorsed.
Additional requirements to users of benchmarks that are supervised entities
Under the Benchmarks Regulation, supervised entities are required to produce and maintain robust written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided.46 If feasible and appropriate, such plans are required to feature the nomination of an alternative benchmark to be used, indicating why it would be suitable. In practice, however, there are no readily available commonly used benchmarks such as LIBOR and EURIBOR, let alone that an alternative can readily be determined in advance.
Supervised entities are required to reflect their written plans, as referred to above, in their contractual relationships with their clients (so not necessarily in all documentation with counterparties). In terms of existing documentation, ESMA requires supervised entities to amend their existing contractual relationships on a best-efforts basis.47 An amendment can, in practice, often be executed by updating the applicable general terms and conditions, but in many circumstances supervised entities will need to contact their clients to amend certain contractual documentation in place between themselves and their clients.
Changes to prospectuses
Where the object of a prospectus to be published under the Prospectus Directive (Directive 2003/71/EC, as amended) or the UCITS Directive (Directive 2009/65/EC, as amended) relates to transferable securities or other investment products that reference a benchmark, the issuer, offeror, or person asking for admission to trading on a regulated market is required, under the Benchmarks Regulation, to ensure that the prospectus includes clear and prominent information stating whether or not the benchmark is provided by an administrator included on the register for benchmarks and administrators maintained by ESMA.48
In practice, certain market participants have included risk factors in prospectuses dealing with the risk of termination of, and material amendments to, benchmarks and risks associated therewith.
Market Abuse Regulation
The new Market Abuse Regulation, which applies as from 4 July 2016, introduced a number of changes relevant to capital market transactions, the most of significant of which related to the introduction of an EEA-wide market soundings regime. Market participants made a significant effort to get to grips with the new market sounding rules throughout 2016 and 2017, implementing policies and procedures to log inside information, insiders, transactions and market soundings.
ii Developments affecting (structured) debt capital markets specifically
The Packaged Retail and Insurance-based Investment Products Regulation
Effective as of 1 January 2018, the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation aims to make in-scope products more transparent and comparable in an effort to make these types of products and their features, as well as their associated risks and cost, more understandable for retail investors. The products within the scope of the PRIIPs Regulation are either packaged retail investor products or insurance-based investment products (which are beyond the scope of this chapter).
Packaged retail investor products
For the purposes of the PRIIPs Regulation, packaged retail investors products are defined as 'an investment . . . where, regardless of the legal form of the investment, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor'.49 The manner in which this term is defined is rather broad and identifying whether a particular product qualifies as a packaged retail investor product may not always be straightforward, especially because products that are within the scope of the PRIIPs Regulation are primarily determined by products that are specifically referred to as being out of scope (such as deposits (or certificates that represent deposits), other than structured deposits50).51
Given the definition of packaged retail investor products, it is clear that fixed rate bonds were never within the scope of the PRIIPs Regulation as fixed rates bonds do not depend on a reference value. However, the position on straightforward floating rate notes (such as bonds that reference LIBOR or EURIBOR) was less clear upon the introduction of PRIIPs, as these type of products could technically fall within the scope of the aforementioned definition. It was nevertheless not long before a market consensus arose that these types of vanilla floating rate bonds should not be considered within scope and that basic features, such as guarantees or simple put or call options, would not, on their own, render vanilla fixed and floating rate bonds to be within the scope of the PRIIPs Regulation.52 On the other hand, products that are typically considered to be within the scope are products such as fund units, structured products and contracts for difference.
Main obligations under the PRIIPs Regulation
The PRIIPs Regulation imposes various obligations on persons manufacturing, advising on or selling PRIIPs – the three main obligations for the purposes of this chapter are:
- for the PRIIP manufacturer to draw up a key information document (KID);
- for the PRIIP manufacturer to regularly review (and, as appropriate, revise) the KID; and
- for a person advising on, or selling, a PRIIP to provide the retail investors with a KID.
The PRIIP manufacturer53 (which would typically include the issuer, but could potentially also include other persons advising on the features or issuance of the PRIIP, such as lead managers) is required to draw up a three-page KID in accordance with the requirements of the PRIIPs Regulation and publish the same on its website.54 The KID should be drawn up before a PRIIP is made available to retail investors55 so that the retail investor is able to understand, and can take into account, the information on the PRIIP.56
The Netherlands has not made use of the Member State options (1) that KIDs should be notified ex ante to the AFM, or (2) to accept KIDs in other languages, meaning that KIDs used in the Dutch market should always be in Dutch.57
The Securitisation Regulation
The Securitisation Regulation came into force on 17 January 2018 and is applicable from 1 January 2019. The main changes brought about by the Securitisation Regulation are the following:
- A concept is introduced of securitisations complying with the standards of being a simple, transparent and standardised (STS) securitisation, which may benefit from favourable capital treatment,58 whereas issuers, originators and sponsors will be responsible for designating a transaction as STS-compliant among themselves.
- A positive obligation is introduced on originators, sponsors and original lenders to ensure that risk retention requirements are satisfied.
- Due diligence procedures (which slightly differed across sectoral legislations) have been harmonised.
- An EU-wide ban on re-securitisations will be introduced.
Alternative Investment Fund Managers Directive and repackaging transactions
Various asset-backed transactions, in particular with a pass-through structure, remain subject to a risk of the issuer or special purpose vehicle qualifying as a manager of an alternative investment fund within the meaning of Directive 2011/61/EU (AIFMD),59 exposing it and associated parties to significant fines, other penalties and regulatory intervention.
Scope of the AIFMD
The rules and obligations as laid down in the AIFMD apply to persons who manage an alternative investment fund (an AIFM). An AIFM performs at least risk management or portfolio management for the alternative investment fund. An alternative investment fund (AIF) is in turn defined as a collective investment undertaking (including investment compartments thereof) that (1) raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and (2) does not require a licence under the UCITS Directive.60 This definition is quite broad and could apply to a number of entities, including issuers of structured financial instruments that would normally not be considered as investment funds. Further guidance can be found in ESMA's Guidelines on key concepts of the AIFMD,61 to which the AFM adheres.62
The regulatory authorities of several other EU jurisdictions have clarified that certain structured finance vehicles from their jurisdiction are beyond the scope of the AIFMD or have issued guidance that a straightforward exemption applies to the extent that issued instruments qualify as debt. This is not the case in the Netherlands. Although the AFM has made it clear that an entity will not qualify as an AIF if investors provide 'debt' to the issuer, it has also noted that 'capital raised with investors under the sole label of debt, is not regarded as debt, if, taking into consideration the legal and/or economic characteristics of such capital and the rights and obligations belonging to investors, in reality such capital is a form of equity'.63 This has led to market uncertainty for structures where, for example, redemption amounts or other payouts fluctuate according to the performance of a basket of collateral.
Audit committees and structured finance vehicles
Pursuant to the Audit Directive,64 public-interest entities are required to have an audit committee, which is a stand-alone body or a committee of the administrative or supervisory board that performs an internal audit function. For the purposes of the Audit Directive, public-interest entities are (1) EEA entities whose transferable securities (including debt securities) are admitted to trading on a regulated market of any EEA Member State, (2) credit institutions,65 (3) insurance undertakings66 and (4) certain entities that are designated as such by EEA Member States.
The Audit Directive includes an option pursuant to which Member States may elect to exempt certain public-interest entities from the obligation to have an audit committee, including, among others, those of which the sole business is to act as an issuer of asset-backed securities67 (provided the entity explains to the public (for example, in its annual report) the reasons for which it considers it not appropriate to have either an audit committee or an administrative or supervisory body entrusted to carry out the functions of an audit committee).68
The Netherlands has made use of the Member State option referred to above. However, the exemption from the obligation of having an audit committee for public-interest entities the sole business of which is to act as issuer of asset-backed securities has been implemented by means of a decree69 featuring an exemption that refers to entities for securitisation purposes, rather than tracking the wording of the Audit Directive, causing some uncertainty as to the scope of the exemption as laid down in Dutch law.
For these purposes, an entity for securitisation purposes is defined as an undertaking:
- that is not a credit institution;
- that has been established for the benefit of one or more securitisations;
- whose activities are limited to what is necessary for those securitisations;
- whose establishment serves to separate its obligations from the obligations of the initiating party;70 and
- whose owners can unconditionally pledge or sell their participation.
A securitisation, in turn, is defined as a transaction or scheme in which (1) the credit risk of a receivable or collection of receivables is divided into at least two tranches, (2) the payments made in the context of the transaction or scheme depend on the performance of the receivables or the collection of receivables, and (3) the ranking of the tranches determines the allocation of losses during the course of the transaction or scheme.71
As such, the Dutch implementation is significantly more restrictive than the exemption contemplated by the Audit Directive itself. In particular, the requirement that the entity is established for the purposes of engaging in tranched transactions would disqualify straightforward repackaging vehicles from relying on the exemption to have an audit committee.
The relevant explanatory memorandum relating to the Dutch implementation of the aforementioned exemption does not explain why the Dutch legislator has opted for its restrictive approach, instead suggesting that the legislator simply wished to make use of the exemption for certain issuers of asset-backed securities as referred to in the Audit Directive. The Dutch capital markets have dealt with this uncertainty by having repacking vehicles instal an audit committee, taking the safe route rather than risking non-compliance.
iii Developments affecting equity capital markets specifically
New Corporate Governance Code
The 2008 Dutch Corporate Governance Code was replaced in 2016 by a new Dutch Corporate Governance Code.
The main changes brought about by the 2016 Code, as compared to the 2008 Code, are the following:
- an increased focus of management on long-term goals and the interests of stakeholders;
- a new focus on the culture of the company;
- more principle-based (and less detailed) rules on remuneration, with the overarching principle that remuneration policies should be clear and understandable;
- increased attention on risk management and the internal audit function;
- new rules on checks and balances within the executive committee, management board and the non-executive or supervisory board, including new rules on diversity and expertise;
- f new rules on the independence of supervisory or non-executive directors, including that they should, in principle, be appointed for not more than two consecutive periods of four years (down from three consecutive periods of four years); and
- g an increased focus on the quality of the explanations given when companies do not apply the Corporate Governance Code.
Legal basis for compliance with the 2016 Dutch Corporate Governance Code
Pursuant to the Dutch Civil Code, Dutch companies that have their shares listed on a regulated market (or equivalent) (but not those who only have non-equity securities listed on a regulated market (or equivalent), unless their shares are listed on an MTF) are required to provide a statement on their compliance with the new 2016 Corporate Governance Code as of the year 2018, on a comply-or-explain basis, as well as any other governance code that they voluntarily apply.
In addition, as of 1 January 2018, Dutch companies whose shares are listed on an MTF (having assets over €500 million (according to their (consolidated, if available) balance sheet with explanatory notes) are also required to provide a statement on their compliance with the 2016 Code, even if they have not issued any securities that are listed on a regulated market. This new rule has been introduced to ensure that companies that are not small or medium-sized enterprises cannot avoid application of the 2016 Code by electing to list their shares on an MTF rather than a regulated market.72
iv Developments affecting financial institutions issuing securities
In 2014 (in respect of credit institutions) and in 2015 (in respect of insurance undertakings), the Dutch legislator implemented certain changes to Dutch tax law allowing for the tax deductibility of coupons paid on CoCos, creating a level playing field for Dutch issuers compared to their EU counterparts in relation to the issuance of regulatory capital (in particular, Additional Tier 1 instruments).
Shortly thereafter, questions were raised as to whether the CoCo tax treatment would constitute illegal state aid to Dutch credit institutions and insurance undertakings. This resulted in the European Commission requesting the Netherlands, on 22 June 2018, to take measures to address what it deemed illegal state aid risks. On 27 June 2018, the State Secretary for Finance published a letter in which he announced that the tax deductibility of coupons paid on CoCos would be abolished with effect from 1 January 2019, citing, among other things, the risks identified by the European Commission.
The risk that the tax deductibility of coupons paid on CoCos is lost as a result of illegal state aid claims is not a risk that is exclusive to the Netherlands, as various other EU Member State also allow this form of tax deductibility in their tax legislation. In his letter of 27 June 2018, the State Secretary for Finance noted that the European Commission had indicated that it would also look into other EU Member States that had implemented specific tax deductibility rules on CoCos for the benefit of the financial sector. The state aid queries raised by the European Commission in respect of the Netherlands may therefore have a knock-on effect on other EU Member States in a similar position in the coming years.
Senior non-preferred debt
On 27 December 2017, a directive amending Directive 2014/59/EU (on the recovery and resolution of credit institutions and investment firms (the bank recovery and resolution directive (BRRD)) was published in the EU Official Journal, pursuant to which a new rank of debt instruments was introduced in relation to entities subject to BRRD – referred to as 'senior non-preferred debt' – to be redeemed immediately after senior unsecured liabilities (such as deposits and other ordinary senior liabilities) and before subordinated liabilities (such as Additional Tier 1 and Tier 2 capital instruments).73 The bill implementing the senior non-preferred asset class in the Netherlands is, at the time of preparation of this chapter, pending before the Dutch parliament, with European law prescribing that the amending directive is to be implemented by 28 December 2018 (a deadline which is likely to be met by the Netherlands).
The Dutch legislator has followed what is now commonly known as the French approach, pursuant to which (1) entities subject to BRRD may elect, case by case, whether to issue instruments as senior preferred or senior non-preferred (or even more subordinated, such as Tier 2 instruments) and (2) existing instruments remain unaffected. This can be contrasted with the German approach, pursuant to which existing senior debt instruments were immediately and retroactively demoted from their senior status to senior non-preferred status following implementation of the senior non-preferred debt asset class in Germany.
III OUTLOOK AND CONCLUSIONS
As a result of the UK Brexit vote, many capital market players have been looking to the Netherlands as their gateway to Europe, for a number of reasons, including the attractiveness of Dutch law, Dutch courts, the good reputation of the Dutch supervisory authorities, and the stability and efficiency of the Dutch government. We expect the Dutch capital markets also to do well in the years to come.
In general, the Dutch capital markets will be affected by further proposed legal and regulatory changes, including, in the context of benchmark reform, the EU Capital Markets Union, the new prospectus rules under the Prospectus Regulation coming into effect in July 2019 and a proposal for a revised EU covered bond framework, as well as Omnibus 3 proposals. In addition, capital markets participants will be on the look-out for the Dutch government's proposals to abolish dividend withholding tax, which in its current form has attracted criticism from both the political opposition and international investors.
1 Marieke Driessen is a partner and Niek Groenendijk is a senior associate at Simmons & Simmons LLP.
2 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms.
3 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003, as amended (including by way of Directive 2010/73/EU).
4 Directive 2013/50/EU of the European Parliament and of the Council of 22 October 2013 amending Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market.
5 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments.
6 Regulation (EU) No. 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments.
7 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market.
8 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds.
9 Commission Delegated Directive (EU) 2017/593 of 7 April 2016, Recital 15.
11 Note that in the context of Euro Commercial Paper programmes, a common market understanding seems to have arisen that in certain cases the relevant arranger and dealers are not to be considered manufacturers (although an assessment will always need to be made on a case-by-case basis). This may be the case in particular when parties take a more administrative role and do not advise the issuer on the structuring of the products issued under the programme.
12 Although, where a MiFID firm acts as both a manufacturer and a distributor, only one target market assessment is required.
13 'Coco's niet geschikt voor meeste particuliere belegger', Dutch Authority for the Financial Markets (AFM), 30 March 2015. See https://www.afm.nl/nl-nl/nieuws/2015/mrt/cocos-particuliere-beleggers.
14 In general, see Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014, Articles 16(3), 23 and 24.
15 See the Market Conduct Supervision Financial Institutions Decree, Article 168a. Exceptions apply, among other things, to (1) inducements that enable or are necessary for the provision of the investment service, (e.g., custody costs, settlement and exchange fees, regulatory levies or legal fees) and (2) minor non-monetary benefits within the meaning of Commission Delegated Directive (EU) 2017/593 of 7 April 2016, Article 12(3), provided the client is informed of such minor non-monetary benefits prior to the commencement of the provision of the services. Further specific exceptions apply to underwriting and placing investment services, provided that certain transparency requirements are met, the inducement enhances the quality of the investment service and the inducement does not lead to conflicts of interests and does not impair the MiFID firm's duty to act in accordance with the best interests of its non-professional client.
16 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014, Article 30(1).
17 Contrary to the Dutch inducement ban, MiFID firms are allowed to receive inducements from third parties provided they forward such amounts directly to their client.
18 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014, Article 24(9). In addition, similar to the Dutch inducement ban, exceptions apply to, among other things, payments or benefits that enable or are necessary for the provision of the relevant the investment services (e.g., custody costs, settlement and exchange fees, regulatory levies or legal fees) (Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014, Article 24(9)).
19 Within the meaning of Commission Delegated Directive (EU) 2017/593 of 7 April 2016, Article 12(3).
20 Commission Delegated Directive (EU) 2017/593 of 7 April 2016, Article 12(1).
21 Within the context of MiFID II, investment research should be understood broadly, covering material and services regarding financial instruments or other assets, the (potential) issuers thereof, or the material or services that are closely tied to a specific industry or market so that it informs a view in relation to financial instruments and other assets and issuers within that sector. The key elements for the material and services to qualify as investment research is that they must (۱) explicitly or implicitly recommend or suggest an investment strategy and (۲) provide a substantiated opinion as to the present or future value or price of the financial instruments or assets, or otherwise contain analysis and original insights and reach conclusions based on new or existing information that could be used to inform an investment strategy and be relevant and capable of adding value to the MiFID firm's decisions on behalf of the relevant clients. See Commission Delegated Directive (EU) ۲۰۱۷/۵۹۳ of ۷ April ۲۰۱۶, Recital ۲۸.
22 Commission Delegated Directive (EU) 2017/593 of 7 April 2016, Article 13.
23 These conditions are that (1) the research payment account is funded by a specific research charge to the client, (2) as part of establishing a research payment account and agreeing the research charge with its clients, the MiFID firm sets and regularly assesses a research budget as an internal administrative measure, (3) the MiFID firm is held responsible for the research payment account and (4) the MiFID firm regularly assesses the quality of the research purchased based on robust quality criteria and its ability to contribute to better investment decisions. See Commission Delegated Directive (EU) 2017/593 of 7 April 2016, Article 13(1)(b).
24 ibid., Article 1(5)(a).
25 Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.
26 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).
27 The Prospectus Regulation, Article 1(5)(b) and Article 1(5) second subparagraph.
28 ibid., Article 1(5)(b) and Article 1(3).
29 Exemption Regulation Dutch Financial Supervision Act, Article 53(4). The requirement to provide the information document does not apply to offerors which are subject to the PRIIPs regulation and managers of investment firms which are required to provide a prospectus to investors on the basis of the Dutch Financial Supervision Act, Article 4:37l(1).
30 For the purposes of the Benchmarks Regulation, an index is any figure that is (1) published or made available to the public and (2) regularly determined (a) entirely or partially by the application of a formula or any other method of calculation, or by an assessment and (b) on the basis of the value of one or more underlying assets or prices, including estimated prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys. See Regulation (EU) 2016/1011, Article 3(1)(1) and, for further guidance, Commission Delegated Regulation (EU) 2018/65 of 29 September 2017.
31 Regulation (EU) 2016/1011, Article 3(1)(3).
32 Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers.
33 Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property.
34 Regulation (EU) 2016/1011, Article 3(1)(16).
35 See Commission Implementing Regulation (EU) 2017/2446 of 19 December 2017.
36 As referred to in Regulation (EU) 2016/1011, Article 3(1)(17).
37 Regulation (EU) 2016/1011, Article 3(1)(5).
38 ibid., Article 3(1)(6).
39 ibid., Articles 31 to 33 (inclusive).
40 ibid., Article 34.
41 ibid., Article 3(1)(8).
42 ibid., Article 15.
43 ibid., Article 16.
44 For these purposes, 'financial instrument' refers to a financial instrument for which a request has been made for admission to trading, or which is traded, on a regulated market, a multilateral trading facility or an organised trading facility, or which is traded via a systematic internaliser and a financial contract refers to a consumer credit agreement within the scope of Directive 2008/48/EC or a consumer credit agreement relating to residential immovable property within the scope of Directive 2014/17/EU.
45 Regulation (EU) 2016/1011, Article 3(1)(7).
46 ibid., Article 28(2).
47 Questions and Answers on the Benchmarks Regulation, ESMA70-145-11 (Version 9), Answer 8.1.
48 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016, Article 29(2). This requirement is without prejudice to outstanding prospectuses approved under the Prospectus Directive prior to 1 January 2018 and prospectuses approved prior to 1 January 2018 under the UCITS Directive. The underlying documents shall be updated at the first occasion or at the latest within 12 months of that date. See Regulation (EU) 2016/1011, Article 52.
49 Regulation (EU) No. 1286/2014 of the European Parliament and of the Council of 26 November 2014, Article 4(1).
50 See Directive 2014/65/EU, Article 4(1)(43).
51 See Regulation (EU) No. 1286/2014, Article 2(2).
52 International Capital Market Association, Quarterly Report, 12 October 2016, Fourth Quarter, Issue 43, page 26.
53 Meaning (1) any entity that manufactures PRIIPs or (2) any entity that makes changes to an existing PRIIP, including, but not limited to, altering its risk and reward profile or the costs associated with an investment in a PRIIP. See Regulation (EU) No. 1286/2014, Article 4(4).
54 See Regulation (EU) No 1286/2014, Article 5.
55 ibid., Article 5(1).
56 Commission Delegated Regulation (EU) 2017/653 of 8 March 2017, Recital 24.
57 See Regulation (EU) No. 1286/2014, Articles 5(2) and 7(1).
58 Note that commercial mortgage-backed securities transactions have been carved out from being capable of qualifying as simple, transparent and standardised transactions.
59 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (AIFMD).
60 ibid., Article 4(1)(a).
61 Guidelines on key concepts of the AIFMD, ESMA/2013/600.
62 Pursuant to the ESMA Guidelines, if any one of the composite elements of the definition of alternative investment funds as referred to above is not satisfied, a structure would not qualify as an alternative investment fund (AIF) for the purposes of the AIFMD. However, these same guidelines also stipulate that the absence of one or more of the characteristics under each of the elements in the definition of an AIF does not conclusively demonstrate that a structure is not an AIF if the presence of all the concepts is otherwise established. See Guidelines on key concepts of the AIFMD, ESMA/2013/600, page 30, para. 5.
63 'Q&A on the AIFMD', AFM, 17 November 2017, page 11 – see https://www.afm.nl/nl-nl/professionals/doelgroepen/aifm/aifm/faq.
64 Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts.
65 Within the meaning of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013, Article 3(1), except those referred to in Article 2 of that Directive.
66 Within the meaning of Council Directive 91/674/EEC of 19 December 1991, Article 2(1).
67 Within the meaning of Commission Regulation (EC) No. 809/2004 of 29 April 2004, Article 2(5).
68 Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006, Article 41(6)(c).
69 Decree on the Instalment of Audit Committees.
70 i.e., the (indirect) originator or the undertaking that buys receivables and subsequently securitises them.
71 Decree on Prudential Rules Dutch Financial Supervision Act, Article 1.
72 Pursuant to the Dutch Financial Supervision Act, Article 5:86, institutional investors whose shares are listed on a regulated market or MTF (or equivalent) are also required to provide a statement on their compliance with the 2016 Code.
73 The aim of these changes to BRRD was to facilitate the issuance of sufficient bail-inable liabilities so that entities subject to BRRD could comply with any applicable global (TLAC) and European (MREL) requirements in relation to minimum amounts of bail-inable liabilities.