Welcome to the 13th edition of the French Financial Institutions Litigation & Regulation Update of the Paris Office of Jones Day.
LEGISLATION AND REGULATION
IMPLEMENTATION OF UCITS V DIRECTIVE INTO FRENCH LAW
The UCITS V Directive (2014/91/EU) of December 18, 2015 was implemented into French law by Ordinance no. 2016-312 of March 17, 2016. The main rules contained in the Ordinance cover liability of depositaries, compensation of asset managers, and sanctions applicable to asset managers. The new rules have taken immediate effect.
Earlier this year (February 3, 2016), the French Securities Regulator (the "AMF") released a guide setting out new rules arising from UCITS V and their impacts on asset managers.
DRAFT LAW WOULD STRENGTHEN ANTI-MONEY LAUNDERING RULES
As previously reported, the Government had announced last year a series of initiatives to improve the tracking of terrorism financing, including a revamped supervision of prepaid cards. On February 3, 2016, the Government released a draft law "strengthening the fight against organized crime, terrorism and their financing."
Provisions relevant to financial law include but are not limited to the following:
- The amount that may be loaded on and redeemed from prepaid cards will be limited by way of secondary legislation.
- The anti-money laundering unit within the French Ministry of Finances known as TRACFIN, which is currently empowered to require documents from entities subject to AML laws, will also be empowered to require documents from entities managing payment systems.
- TRACFIN would be empowered to call for vigilance with respect to certain sensitive situations in order for the entities subject to AML laws to implement due diligence measures. TRACFIN already currently issues calls for vigilance, but the legal basis for doing so was unclear.
The draft law also empowers the Government to transpose into French law the 4th AML Directive (2015/849/EU of May 20, 2015) within six months of the promulgation of the law.
The draft law is currently being discussed before Parliament and is expected to be adopted in final form in the course of May.
EUROPEAN CENTRAL BANK APPROVES FRENCH LEGISLATIVE PROPOSAL TO CREATE NEW CATEGORY OF CREDITORS OF CREDIT INSTITUTIONS FOR RESOLUTION PURPOSES
As previously reported, the French Ministry of Finance published late last year a legislative proposal introducing a new category in the ranking of creditors of credit institutions. The proposal's goal was to facilitate the implementation of resolution procedures as provided for in the Bank Recovery and Resolution Directive (2014/59/EU). On February 23, 2016, the European Central Bank (the "ECB") published an approving opinion on the legislative proposal. The proposal would create legal certainty about the loss-absorbing capacity of the newly created class of senior unsecured debt securities or instruments.
The ECB notes that the new category affects both the loss-absorbing capacity of the newly created class of senior nonpreferred debt instruments and the Total Loss Absorbing Capacity ("TLAC") requirement. This change of hierarchy among creditors would increase the loss-absorbing capacity of banks in resolution when they issue debt instruments belonging to the new category of senior nonpreferred debt instruments. In addition, the establishment of a statutory basis for the issuance of debt instruments, including contractual subordination arrangements, would facilitate the implementation of the Financial Stability Board's standard for a minimum TLAC requirement for globally systematically important banks.
The ECB notes that senior nonpreferred debt instruments would not be eligible as collateral for Eurosystem credit operations due to the subordination of senior nonpreferred debt instruments to senior preferred debt.
POSITIONS AND GUIDANCE FROM AUTHORITIES
SECURITIES REGULATOR PUBLISHES GUIDE SETTING OUT IMPACT OF MiFID II/MiFIR ON ASSET MANAGERS
On March 16, 2016, the AMF published a pedagogical guide setting out the repercussions of Directive 2014/65/EU of May 15, 2014 on markets in financial instruments ("MiFID II") and Regulation 600/2014/EU of the same day ("MiFIR") on portfolio management companies. The document first sets out changes of status applicable to portfolio management companies. Under current French rules, portfolio management companies—whether managing collective investment schemes (UCITS or AIFs) or providing the MiFID investment service of discretionary portfolio management—qualify as investment firms subject to MiFID obligations. This goldplating practice resulted in subjecting all management companies to MiFID obligations. As from the entry into force of MiFID II and MiFIR:
- Management companies authorized to manage collective investment schemes will no longer qualify as investment firms.
- Management companies authorized to manage collective investment schemes and provide discretionary portfolio management will no longer qualify as investment firms and will be subject to MiFID II for the service of portfolio management only.
- Undertakings authorized to provide discretionary portfolio management only will no longer qualify as management companies and will qualify instead as full-fledged investment firms subject to MiFID II.
The guide then deals with product governance, independent investment advice, client information, adequacy and appropriateness tests, reporting, inducements, and best execution. For each of these topics, the AMF provides a synthetic brief overview.
FRENCH CONSTITUTIONAL COUNCIL RULES ON ASSET-FREEZING MINISTERIAL POWERS
Asset-freezing powers of the Ministry of the economy against legal persons or entities that committed, are committing, or attempt to commit acts of terrorism, or that encourage, facilitate, or take part in such acts, were challenged before the French Constitutional Council (Conseil constitutionnel) on the ground that they violated constitutional rules relating to separation of powers, presumption of innocence, and property rights. In the case of international sanctions (as part of the United Nations or the European Union), asset freezing may also be extended to persons likely to commit sanctioned acts on account of their functions.
The French Constitutional Council ruled on March 2, 2016 that such ministerial prerogative did not impinge on criminal courts' jurisdiction—the administrative procedure and the criminal procedure being independent of each other—and therefore did not violate the separation of powers. The French Constitutional Council also notes that entities whose assets are frozen through this ministerial procedure were not denied the right to challenge asset-freezing measures before councils.
However, the French Constitutional Council struck down as unconstitutional the application of asset freezing to persons "likely to commit on account of their functions" acts sanctioned internationally, on the basis that extending asset freezing to them—without the need to establish that these persons have indeed committed such acts—disproportionately infringes property rights.
Due to its unconstitutionality, the applications of asset freezing to persons likely to commit on account of their functions acts sanctioned internationally has been repealed as of March 4, 2016.
FRENCH ADMINISTRATIVE SUPREME COURT CONFIRMS DECISION OF AMF ENFORCEMENT COMMITTEE IN CASE RELATING TO INSIDE INFORMATION AND COMPLIANCE PROCEDURE
An employee from an investment firm was made aware of a project of potential capital increase from a listed company. The employee had not informed the investment firm that it held this inside information. On April 9, 2013, the AMF Enforcement Committee issued a warning against the employee on the ground that the employee had failed to inform the firm that he held information characterized as inside information. The Committee also ruled that the firm had properly established an appropriate procedure for monitoring the issuers and financial instruments on which they have inside information and that it had drawn up a watch list of the issuers and financial instruments on which it held inside information.
The AMF Enforcement Committee's decision was appealed by both the AMF Chairman and the employee: the AMF chairman sought a more severe sanction against the employee and a sanction against the firm, while the employee sought the annulment of the warning levied against him.
On February 3, 2016, the French Administrative Supreme Court (Conseil d'État) confirmed the AMF Enforcement Committee's decision on the ground that the firm had properly observed compliance procedures and that knowledge of the project of capital increase qualified as inside information (even if such information could be considered as predictable by financial analysts or if the employee had also been informed of alternative financing options).
FRENCH ADMINISTRATIVE SUPREME COURT RULES THAT A PRESS RELEASE MAY BE CHALLENGED BEFORE COURT IN CERTAIN CIRCUMSTANCES
The AMF discovered that a company that sold real estate investments was marketing such investments aggressively and that salespersons presented them unfairly. The AMF therefore issued a press release calling for the vigilance of potential investors. Before the French Administrative Supreme Court, the company sought that the press release be annulled and that the AMF be held liable for issuing it.
Under case law prevailing so far, a press release with no binding effect (i.e., investors may still invest despite the warning) could be challenged in restrictive circumstances only, as it was necessary for the subject matter of the press release to be capable of giving rise to a sanction.
On March 21, 2016, the French Administrative Supreme Court introduced a new criterion facilitating the challenge of press releases where the press release has some significant bearing or may significantly influence the addressee's behavior. In its decision, the French Administrative Supreme Court ruled that the press release met this test (since subscriptions to the investments decreased suddenly after the release of the press announcement). However, the French Administrative Supreme Court did not annul the press release since the AMF had jurisdiction to issue it and the AMF had not committed "a manifest error of assessment."