European Central Bank Proposes to Expand the Use of the Legal Entity Identifier with Overhaul of Prospectus Rules in the European Union

European Central Bank published its opinion on the European Commission’s proposal for a 'Regulation on the prospectus to be published when securities are offered to the public or admitted to trading'

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On 17 March 2016 the European Central Bank (ECB) published its opinion on the draft European Union (EU) ‘Regulation on the prospectus to be published when securities are offered to the public or admitted to trading’. In this opinion, the ECB states: “The proposed regulation aims to ensure investor protection and market efficiency while enhancing the single market for capital. To that end, information made available to investors should be ‘sufficient and objective’ and presented in ‘an easily analysable, succinct and comprehensible form’. This information should include unique identifiers for both the security and the issuer. As stated on previous occasions, the ECB strongly supports the use of internationally agreed standards, such as the [International Securities Identification Number] ISIN and the global [Legal Entity Identifier] LEI. The unique identification of issuers, offerors and guarantors and of securities offered to the public or admitted to trading on regulated financial markets can only be successful if international standards such as the global LEI and the ISIN are used.”

This blog describes the specific amendments proposed by the ECB to the envisioned new EU prospectus rules. These amendments would make it “compulsory to include the global LEI in prospectuses or registration documents for securities covered by the proposed regulation”, i.e. establish mandatory requirements for including the LEI of the issuer, the offeror and the guarantor in a prospectus.

The Global Legal Entity Identifier Foundation (GLEIF) very much welcomes the amendments to the draft new EU prospectus rules proposed by the ECB relevant to the LEI as an important step to increase transparency and mitigate risk. GLEIF and its partnering LEI issuing organizations are ready to handle LEI issuance to support this initiative.

Sources cited in this blog are included in the ‘related links’ below.

Recap: European Commission proposal to overhaul the EU prospectus regime

On 30 November 2015, the European Commission introduced its proposal for a ‘Regulation of the European Parliament and of the Council [of the EU] on the prospectus to be published when securities are offered to the public or admitted to trading’.

The EU executive body stated that the proposed overhaul of the prospectus rules “ will enable investors to make informed investment decisions, simplify the rules for companies that wish to issue shares or debt and foster cross-border investments in the [EU] Single Market. (…) A prospectus is a legal document that describes the company, its main line of business, its finances and shareholding structure. It contains the information an investor needs to have before making a decision whether to invest in the company.”

ECB sees merit in expanding the use of the LEI “by making it compulsory to include the global LEI in prospectuses or registration documents for securities” covered by the proposed new prospectus rules

In its opinion on the draft ‘Regulation on the prospectus to be published when securities are offered to the public or admitted to trading’ the ECB “supports the use of the global LEI system, as endorsed by the European Banking Authority (EBA) and European Securities and Markets Authority (ESMA), in a manner which is in line with the Financial Stability Board’s (FSB’s) recommendations [on a Global Legal Entity Identifier for Financial Markets]. The global LEI allows the issuers, offerors and guarantors of the security to be uniquely identified, thus providing key information to the investor. Furthermore, the use of the global LEI is growing rapidly with regard to the identification of legal persons and structures and therefore the ECB sees merit in expanding its use by making it compulsory to include the global LEI in prospectuses or registration documents for securities covered by the proposed regulation. The ECB is of the opinion that the obligation to report the ISIN and LEI should be established both in the proposed regulation and in any related Commission delegated acts implementing the proposed regulation, which the Commission is required to adopt to specify the format of prospectuses.”

In the Annex to its opinion, the ECB provides drafting proposals on this issue, i.e. suggestions on how to change the legal text of the draft Regulation tabled by the European Commission. Specifically, the ECB proposes to amend the text of the following provisions included in the draft legislative text (strike through indicates proposed deletions; bold text indicates new text proposed by the ECB):

Article 7 (5), first paragraph:
‘5. The introduction of the summary shall contain:

(a) the name of the securities;
(b) the identity and contact details of the issuer; including their legal entity identifier (LEI);
(c) the identity and contact details of the offeror, including their LEI if the offeror has legal personality, or of the person seeking admission;
(d) the identity and contact details of the home competent authority and the date of the document. […]’;

This amendment lays down a mandatory requirement for including the LEI of the issuer and the offeror in a prospectus.

Article 7 (6) (a), first indent:

‘(a) under a sub section titled “Who is the issuer of the securities?”, a brief description of the issuer of the securities, including at least the following:

- its domicile and legal form, the legislation under which it operates, and its country of incorporation, and its LEI;’

This amendment lays down a mandatory requirement for including the issuer’s LEI in a prospectus.

Article 7 (7) (c)

‘(c) under a sub-section titled “Is there a guarantee attached to the securities?” a brief description of the nature and scope of the guarantee, if any, as well as a brief description of the guarantor, including its LEI.’

This amendment lays down a mandatory requirement for including the guarantor’s LEI in a prospectus.

Article 20 (6)

‘At the latest from the beginning of the offer to the public or the admission to trading of the securities involved, ESMA shall publish all prospectuses received from the competent authorities on its website, including any supplements thereto, final terms and related translations where applicable, as well as information on the host Member State(s) where prospectuses are notified in accordance with Article 24. Publication shall be ensured through a storage mechanism providing the public with free of charge access and a search functions. Key information contained in the prospectuses, such as the ISIN identifying the securities and the LEI identifying the issuers, offerors and guarantors, should be machine-readable, including metadata.’

This amendment seeks to ensure that the centralised online storage mechanism to be established by ESMA will not only have a search function for the prospectuses in portable document format, but that it will also ensure that the most relevant information contained in the prospectuses is machine-readable using meta-data, allowing certain fields in the prospectus file to be directly machine-readable in order to enable a database to be established either by ESMA or third parties that contains this key information in a bulk downloadable format. The key attributes which must be machine-readable using meta-data include: the identification of the securities (via the ISIN) and of issuers, offerors and guarantors (via the LEI), and other attributes vital to ensuring that investors have effective access to reliable data that can be used and analysed in a timely and efficient manner.

Next steps

The draft ‘Regulation on the prospectus to be published when securities are offered to the public or admitted to trading’ proposed by the European Commission is being reviewed, respectively, by the European Parliament and the Council of the EU representing EU Member States. Each of these bodies draft their own proposed amendments to the legal text introduced by the Commission with a view to agree a final version in the further course of the legislative process leading to the adoption of this new EU law. Whether the amendments to the legal text proposed by the ECB regarding the use of the LEI will be included in the final version of the Regulation therefore, remains subject to the decision by the European Parliament and the Council of the EU.

Background information: the EU legislative process

The European Commission has the right of initiative to propose laws for adoption by the EU co-legislators, i.e. the European Parliament and the Council of the EU. (The Council of the EU is the EU institution where the EU Member States’ government representatives sit, i.e. the ministers of each EU Member State with responsibility for a given policy area.) The vast majority of European laws are adopted jointly by the European Parliament and the Council of the EU representing EU Member States under the so-called ordinary legislative procedure. This legislative procedure gives the same weight to the European Parliament and the Council of the EU in a wide range of areas.

In line with relevant provisions of the Treaty on the Functioning of the EU the ECB is competent to deliver an opinion on EU legislative proposals affecting the European System of Central Bank’s tasks to implement monetary policy and contribute to the smooth conduct of policies pursued by the competent authorities relating to the stability of the financial system.

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