Securities Act of 1933 - Rule 902 (b)
No Action, Interpretive and/or Exemptive Letter:
|Re:||Channel Islands Stock Exchange|
Incoming letter dated September 6, 2002
Dear Ms. Menteshvili:
This letter will confirm the response of the Division of Corporation Finance to your request that the Division designate the Channel Islands Stock Exchange as a "designated offshore securities market" within the meaning of Rule 902(b) of Regulation S under the Securities Act of 1933. A copy of your letter is enclosed in order to avoid having to recite or summarize the facts set forth therein. On the basis of the facts presented, we hereby so designate the Channel Islands Stock Exchange.
Pursuant to delegated authority,
Paul M. Dudek
Office of International Corporate Finance
Mr Alan Beller
Division of Corporation Finance
Securities and Exchange Commission
Mail Stop 4-1
450 Fifth Street N.W.
Washington DC 20549
6 September 2002
Dear Mr Beller
Channel Islands Stock Exchange
Application for Designation as a "Designated Offshore Securities Market"
The Channel Islands Stock Exchange ("CISX"/"Exchange") hereby apply for Designated Offshore Securities Market designation in accordance with SEC Rule 902(b)(2) of Regulation S, under the Securities Act of 1933, as amended.
In applying for this designation, we respectfully submit the detailed information about the CISX, following the criteria set out in the above Rule.
(i) Organisation under Foreign Law
The CISX was established in March 1998 as a company limited by guarantee (LBG), with shares, under the Company (Guernsey) Law, 1994 to 1996. This means the company is a hybrid one, with two classes of members under its Articles of Association - one class of member is a Guarantee Member, the other is a shareholder.1
For information, incorporation of Guernsey companies requires the services of a local advocate (lawyer) and applications for registration are reviewed by H M Procureur (Her Majesty's Attorney General) in conjunction with Guernsey's financial regulatory authority, the Guernsey Financial Services Commission.
The Exchange's main objects as set out in its Memorandum of Association are:
The CISX is licensed and regulated by Guernsey Financial Services Commission ("Commission"), Guernsey's regulatory authority, to carry out the restricted activity of "operating an investment exchange" under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 ("POI Law"), as amended.
The POI Law is one of the primary pieces of legislation in place governing investment business and encompasses the requirement for persons who, in or within the Bailiwick of Guernsey, carry on a restricted activity - defined in Schedule 2 of the POI Law as promotion, subscription, registration, dealing, management, administration, advising and custody of securities. Also included within Schedule 2 of the POI Law is the restricted activity (which requires a licence to be issued by the Commission) of operating an investment exchange, "that is to say, providing a facility, whether by electronic means or otherwise, for the orderly trading of securities, or for the listing of securities for the purpose of trading, by members of the investment exchange". There are provisions within the POI Law for the making of rules and regulations controlling the conduct of investment business.
Operation of the Exchange
As an independent, commercial company, management and control of the Exchange are vested in the Board of Directors ("the Board") which currently consists of nine directors.
The powers of the Board are set out within the Articles of Association of the Company and in the Rules of the Exchange. In addition to the usual powers of company directors, they provide, inter alia, for the admission of new Members, approvals for listings, the surveillance and supervision of the Exchange and Member discipline. In a number of areas, these powers have been delegated to the Market Authority, which comprises the Chief Executive and senior executive staff of the Exchange.
Under Article 27(5) of the Articles of Association, which sets out the delegation of certain powers from the Board to the Market Authority, the Market Authority shall have, inter alia, the following powers:
The CISX Listing Rules are the rules which regulate the admission of entities to the Official List and impose ongoing obligations on listed entities. All listing applications must be sponsored by a Listing Member of the Exchange. The CISX operates one market only.
The Exchange offers listing facilities for the following products:
Although a number of other instruments could be listed and traded on the Exchange, the Directors decided to limit the initial range of products in order to develop the Exchange in accordance with its business plan. Therefore, the current Listing Rules, which are modelled upon the requirements set out in the London Stock Exchange "Yellow Book" (for equities), the Irish Stock Exchange (for investment funds) and the Luxembourg Stock Exchange (for specialist debt securities) and have been subject to extensive practitioner and regulatory review, cater only for investment funds, debt instruments and equities.
The Listing Rules are available in electronic form through the Exchange's web-site, www.cisx.com, which is used for marketing and promotional purposes by the Exchange and on behalf of its Members and listed entities. Hard copies of the Listing Rules are also available and provided to all Listing Members, together with guidance notes and application checklists.
The admission requirements include that the entity issues a Listing Document (prospectus), or if the CISX agrees, an information memorandum. The prospectus requirements are such that the entity must be duly incorporated in accordance with the company laws in the jurisdiction of establishment.
The minimum requirements for a "public company" (equity securities other than investment funds which have other requirements) include:
After listing, the entity is subject to the ongoing requirements set out in the Listing Rules. These include continuous and periodic disclosure of pertinent information such as interim and annual reporting. Generally, the requirements are that the issuer, or its designated agent, appraises the CISX of any developments in the listed security. Where applicable, and as soon as practicable following publication of documents such as financial statements and reports, the issuer shall furnish the CISX with such documents. There are certain disclosure requirements regarding any changes to rights, powers or privileges in relation to the listed debt security and any change in the rate of interest. Equality of treatment of shareholders is the underlying principle in relation to the disclosure of information and there is a general duty to inform the CISX of notices and announcements sent out to shareholders.
The predominant securities listed on the CISX are investment funds (both open-ended and closed-ended). The CISX market consists of shares in local trading companies and closed-ended investment funds. As at 31 December 2001, there are three local trading companies (one of which is listed on a primary basis) and seventy-five closed-ended investment funds (mostly secondary listings to the London Stock Exchange) admitted to the CISX Official List.
There were 629 transactions reported during 2001. The Trading Volume statistics are as follows:
|Number of Shares Traded||75,327,426||31,676,148||32,598,695|
|Value of Shares Traded||£76,262,293||£47,032,605||£52,420,553|
The table below sets out the share volumes for the securities traded during 2001.
Operation of the CISX market is covered under sub-paragraph "v" below.
(ii) Association with a generally recognised community of brokers, dealers, banks or other professional intermediaries with an established operating history
The Exchange's membership structure consists of Trading Members and Listing Members. As at 31 August 2002, there are 33 Members of the Exchange, three of which are Trading Members (stock brokerage firms). The three Trading Members are Collins Stewart (CI) Ltd (regulated by the Commission), Dresdner Kleinwort Wasserstein Securities Ltd and Winterflood Securities Ltd (the latter two are regulated by the UK's Financial Services Authority). A full list of Members is provided within Appendix I.
The criteria for membership are as follows:
A Member of the Exchange must be a corporation, partnership or legal entity licensed, regulated or supervised by a regulatory body in a recognised jurisdiction approved by the Exchange or in the case of a Listing Member that is not licensed, regulated or supervised by a regulatory body, be a member of a professional body approved by the Exchange. A list of such recognised jurisdictions, and regulatory and professional bodies is provided within Appendix II.
In addition, applicants for Membership must:
An organisation can be either a Trading Member or Listing Member or both.
In addition to compliance with the general qualifications as set out above, an applicant for Membership as a Trading Member (stock brokerage firms) must:
A Trading Member may register as a Market Maker in listed securities specified by the Trading Member, and in doing so will be required to comply with the Exchange's obligations of a Market Maker.
A Listing Member must be established as an entity in the Channel Islands and must have suitably qualified staff, to ensure proper co-ordination with the Exchange. An issuer wishing to have its securities listed on the Exchange is required to engage the services of a Listing Member who will act as a sponsor. There are two categories of sponsor, as set out below:
Category 1 Members may sponsor all types of securities to listing. Category 1 Members need to satisfy the Exchange of their ability to provide an adequate level of service to issuers by demonstrating that:
Applicants for Category 1 Members are required to submit career details of key staff and evidence, in the form of a track record of transactions conducted on behalf of clients, which demonstrates that the applicant has sufficient experience in the field of corporate finance business.
Category 2 Members may only sponsor the listing of investment funds. Applicants for Category 2 Member will need to demonstrate to the satisfaction of the Exchange that they have sufficient experience and expertise in the administration and/or listing of investment funds to fulfil their role as sponsor.
There are currently 28 Listing Members, of which one third are law firms providing a full range of corporate services, one Member is an accountancy firm, and the balance of Listing Members are investment fund managers or administrators.
The responsibilities of Listing Sponsors are set out in the Listing Rules but broadly a sponsor is required to:
The number of securities admitted to the Official List totalled 255, as at 31 December 2001, with a market capitalisation of approximately US$15 billion. Two thirds of the securities admitted to the Official List are on a primary basis. A copy of the Exchange's Official List is provided within Appendix III.
(iii) Oversight by a government or self-regulatory body
The CISX is authorised by the Commission, being licensed and supervised under the POI Law and Rules and Regulations made therein. These Rules and Regulations are described within section iv below. The Commission was established as a statutory body by Guernsey's Parliament, known as the "States of Guernsey", under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the Law). The Commission came into being on 1 February 1988.
The Law established the Commission with both general and statutory functions. The general functions include the taking "of such steps as the Commission considers necessary or expedient for the development and effective supervision of the finance business in the Bailiwick of Guernsey" and the statutory functions include a number of laws such as The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended; The Protection of Depositors, Companies and Prevention of Fraud (Bailiwick of Guernsey) Law, 1969, as amended; The Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended; and the Insurance Business (Guernsey) Law, 1986 as amended. In carrying out its general functions, the Commission is required by the Law to have particular regard to (a) the protection of the public against financial loss due to dishonesty, incompetence or malpractice by persons carrying on finance business; and (b) the protection and enhancement of the reputation of the Bailiwick of Guernsey as a finance centre.
The Commission maintains a relationship with or is a member of a number of international regulatory and supervisory bodies. These are set out below by sector:
In May 2000, the G-7 Financial Stability Forum (established by the G-7 Ministers) judged Guernsey to be a Group 1 jurisdiction (the top group of offshore financial centres), considering Guernsey to have an appropriate legal infra-structure, supervisory practices and a level of resources devoted to supervision and co-operation relative to the size of its financial activities.
In June 2000, the Financial Action Task Force, on behalf of the Offshore Group of Banking Supervisors, completed its review of Guernsey's anti-money laundering system and concluded that Guernsey is co-operative and has a comprehensive anti-money laundering system.
Guernsey is within an OECD jurisdiction (United Kingdom) and OECD conventions apply.
Guernsey was recognised as a 'Qualified Intermediary' jurisdiction by the US Internal Revenue Service in September 2000.
Guernsey is a 'Designated Territory' under Section 270 of the UK Financial Services Markets Act, 2000 (formerly Section 87 of the UK Financial Services Act, 1986).4
(iv) Oversight standards set by an existing body of law
Under the Regulations and Rules made under the POI Law, the CISX is subject to The Investment Exchange (Notification) Rules ("IEN Rules"), 1998, a copy of which is provided within Appendix IV, and The Licensees (Financial Resources, Notification, Conduct of Business and Compliance Rules, 1998 ("FNCC Rules"). A summary of applicable Rules is also provided within Appendix IV.
These Regulations and Rules are statutory requirements applied and enforced by the Commission. Under these Regulations and Rules, the Commission carries out supervisory inspection visits to the Exchange and the Exchange must comply with a number of requirements such as the filing of quarterly, half-yearly and yearly returns, including its business and regulatory plan, financial statements and compliance reports. The Commission has the right of access and inspections and the CISX "must co-operate to the fullest possible degree with any inspection carried out by the Commission in respect of the conduct of its controlled investment business".
The prudential rules, under the IEN Rules include the provision of:
There is a duty of notification by the Exchange to the Commission with regard to securities listed or dealt on the Exchange, including notification of any proposed changes in the type of investments listed or dealt on the Exchange and where the Exchange discontinues or suspends the listing of any type of investments listed or dealt on the Exchange. In addition the Exchange must notify the Commission of the trading hours of the Exchange, any trading halt or any suspension of trading of any security.
The FNCC, the conduct of business rules, apply to all licensees under the POI Law and, briefly, requires the CISX to establish and maintain:
The Commission, in carrying out its oversight responsibilities, requires the CISX to comply with the IOSCO Principles (25 to 30) in respect of the standards for the operation of the secondary market.
(v) Reporting of securities transactions on a regular basis to a governmental or self-regulatory body
The CISX is a screen-based market, with no trading floor. The trading hours of the CISX are from 8.00am until 4.30pm, Monday to Friday. All Trading Members must have access to Reuters (the Exchange's trading platform) as part of their Membership requirement. All securities transactions must be reported to the Market Authority of the Exchange by Trading Members within three minutes of the trade. For trade reporting, the CISX requires the following information: counter-party ID, security, price, date, time and size.
The price of all deals reported is distributed immediately by the CISX via Reuters. Information published pursuant to a trade report includes size and time of sale, together with the price. The Market Authority sets and publishes the normal market size for each security within the CISX pages on Reuters. The Commission, as well as any user of Reuters has access to the CISX pages on Reuters (CISXINDEX) for prices and other market data.
The Market Authority has the power under the IEN Rules (discussed under section iv) to suspend trading in any security.
The Rules governing Trading also provide for, inter alia:
Market Maker obligations are set out in Chapter V of the Membership Rules of the Exchange (headed "Trading") and include the requirements to enter and maintain at all times two-sided quotations on the trading system; and actively offer to buy from and sell to an enquiring Trading Member at the price and in a size up to that displayed by it.
Trading volume has averaged 45 million shares per annum, with an average share value of £58 million.
(vi) A system for exchange of price quotations through common communications media
The Exchange's screen-based trading platform is based on Reuters' Triarch network installed at the Exchange's St. Peter Port, Guernsey offices. The Exchange's pages on Reuters are accessed by simply entering CISXINDEX and following the menu choices.
The key features of the trading system are as follows:
(vii) An organised clearance and settlement system
The Rules relating to the settlement of transactions are set out in Chapter VI of the Membership Rules of the Exchange and deal with, inter alia:
Trading in the shares of local companies are settled via Crest or Crest Residual. International debt issues, and other eligible issues, are settled through either Cedel Bank or EuroClear unless otherwise agreed, by the parties to the transaction, at the time of trade. Under the Rules of the Exchange, the Market Authority shall determine the standard settlement period for each security, which in general follows market practice for the type of security concerned. (Current market practice (following London) is for the settlement of domestic and foreign equities on a T+3 basis.)
In terms of its international profile, the CISX is:
Based upon the above considerations, we formally request the Director designate the CISX as a Designated Offshore Securities Market, within the meaning of SEC Rule 902(b)(2).
For any questions concerning this application, please contact the undersigned as follows:
Ms Tamara Menteshvili
The Channel Islands Stock Exchange
P O Box 623
One Lefebvre Street
St Peter Port
Guernsey GY1 4PJ
Tel: (+44) 01481 713831
Fax: (+44) 01481 714856
The Channel Islands Stock Exchange
|List of CISX Member Organisations||Appendix I|
|List of Recognised Jurisdictions
(for the purposes of Membership)
|CISX Official List||Appendix III|
|Regulatory Oversight Standards||Appendix IV|
|Webmaster's Note: These appendices are not available in electronic format on this site.|
|1||Each Guarantee Member of a Guarantee Company undertakes to contribute to the assets of the Company in the event of its being wound up, whilst he is a Member or within one year of his ceasing to be a Member. The contribution is the amount to be required to discharge the Company's debts and pay the cost of winding up to a specified maximum (£10,000). The effect of the Guarantee is that a Member is not obliged to pay the sum guaranteed while the Company is a going concern, the liability arising if a contribution is needed to pay the Company's debts when it is being liquidated. |
A Company Limited by Guarantee with shares (as is the case of the CISX) can also issue shares which, unlike guarantees, must be paid up by shareholders.
|2||This provision is to allow the Company to provide additional services such as registrar services in connection with clearing and settlement, which it does not currently provide nor is there currently any intention to provide such services.|
|3||There are two types of Guarantee Members, one which is a Listing Member (aka, listing agent) that sponsors listing applications on behalf of issuers, the other which is a Trading Member (i.e. stock brokers and market makers).|
|4||In December 1988, the Bailiwick of Guernsey was granted Designated Territory status under Section 87 of the UK Financial Services Act (FSA), 1986. Granting of this status recognises that the rules in Guernsey governing Class A investment funds (European Union 'UCITS' equivalent funds which closely follow the rules which apply to UK authorised collective investment funds under the FSA) provide investors with protection at least equivalent to that provided under the FSA. Section 87 of the FSA, 1986 has been superseded by Section 270 of the Financial Services Markets Act, 2000. Article 67 of Statutory Instrument 2001/2636 specifies that designation orders previously made under Section 87 of the Financial Services Act, 1986 also apply to Section 270 of the Financial Services Markets Act, 2000.|
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