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Exclusive Q&A on Capital Markets with Zvi Gabbay

Posted: 16th September 2016 08:32
What Are The Main Regulators And Legislation That Apply To Capital Markets In Your Jurisdiction?

The Israeli financial system is supervised and regulated primarily by three regulators: the Banking Supervision Department, situated in the Bank of Israel; the Capital Market, Insurance and Savings Department, situated in the Ministry of Finance; and the Israel Securities Authority. These three agencies regulate the activity of banks, insurance companies, pension and provident fund managers, mutual fund managers, portfolio managers and investment advisors, brokerage firms, the Tel Aviv Stock Exchange and alternative trading platforms, as well as public companies and securities and financial product trading. Another noteworthy agency that should be mentioned in this context is the Israel Money Laundering and Terror Financing Prohibition Authority, situated in the Ministry of Justice.
The abovementioned agencies operate pursuant to a number of statutes that provide for the regulators' authority and powers as well as the regulatory rules that govern the conduct of the supervised entities. Among these statutes are the Israeli Securities Law – 1968, the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law – 1995, the Joint Investment Trust Law – 1994, Regulation of Activity of Credit Rating Companies Law – 2014, Banking (Licensing) Law – 1981, Banking (Service to Consumer) – 1981, Control of Financial Services Regulations (Insurance) (the Board of Directors and its Committees) - 2007, Control of Financial Services (insurance) Law - 1981Control of Financial Services (provident funds) Law -2005Control of Financial Services (pension counseling and pension marketing) Law - 2005, and the Control of Financial Services Regulations (provident funds) (distribution commission) - 2006.
What Impact Will Brexit Likely Have On UK, European And Global Capital Markets In Regards To Future Relationship And Financial Regulations? 

At this point in time I do not believe that this is a question that many lawyers are able to answer, especially in Israel, which is not part of the European Union. That being said, it is clear that Brexit reminded market participants, regulators and governments just how fragile international relationships and conventions are, and might deter regulators from striving towards the development of global regulatory standards and principles that are essential for international financial activity. In Israel, for example, local regulators have always been fairly sceptical of foreign regulatory regimes and typically preferred to establish local regulatory rules and principles instead of adopting existing foreign regulations. This tendency of local regulators imposes additional complication and costs on international financial entities seeking to operate in Israel, and requires Israeli lawyers to develop a high level of familiarity with foreign regulation in order to assist their international clients with advice that takes into account both foreign financial regulation requirements in addition to Israeli requirements. 

Have There Been Any Other Recent Regulatory Changes Or Interesting Developments?

From an Israeli perspective, we see a slow but steady trend of opening up the Israeli financial sector to international players. A few years ago, an innovative legislative amendment introduced the "Foreign Dealer" mechanism, allowing foreign investment advisors and portfolio managers to render their services to non-eligible Israeli clients under the conditions of the mechanism. Recently, another legislative amendment enables foreign fund managers to market their funds to the Israeli investing public without having to publish a prospectus under Israeli law. Additionally, there are a number of amendments promoted by the Israel Securities Authority that should continue this trend, increasing the exposure of Israeli investors and traders to foreign funds, foreign fund managers and issuers. 

What Are The Current Trends And Strategies For Companies Raising Funds In Capital Market?

Israeli policy makers are highly aware and deeply troubled by the trend that has developed in recent years according to which growing businesses in Israel raise funds through foreign stock exchanges, instead of going public in Israel. This trend has led the Israeli regulator, together with the Tel Aviv Stock Exchange ("TASE"), to promote important legislative amendments aimed at turning the TASE into a more attractive platform for raising funds. The amendments include, among other things, an adjustment period during which only part of the obligations and requirements applicable to public companies will apply to the company that offers its securities for trade under these amendments, as well as a fundamental change in the holding structure of the TASE that will enhance the attractiveness of the exchange. 

To What Extent Is Shareholder Activism An Issue For Companies Operating Within Capital Market?

Israel is unique in the typical holding structure of public companies. Most of the Israeli companies traded on the Tel Aviv Stock Exchange are controlled by a controlling shareholder or shareholding group that owns approximately 70-80% of the shares, while the public holds the remaining 20-30%. Therefore, when using the term "shareholder activism" in Israel, it typically describes minority shareholders seeking to protect their rights vis-à-vis the majority shareholder that controls the company. In addition, during recent years a number of legislative amendments were introduced to increase the minority shareholders' involvement in certain aspects of the company's management. For example, the Israeli version of the U.S. "Say on Pay" was implemented by legislation that requires enhanced transparency of the compensation methods and structure as well as shareholder approval in specified circumstances. On the other hand, shareholders – especially minority shareholders – may take a narrow approach trying to maximise their short term agenda, while not giving sufficient weight to broader long term planning. This is one of the main challenges that the regulator must deal with in connection with shareholder activism, ensuring that the company's management can steer the company's business as it deems appropriate. 

With Regards To Both New Opportunities And Cyber Security Challenges, Can You Discuss The Way In Which New Financial Technologies Are Changing The Capital Markets Landscape?

The regulation of capital markets is based, to a great extent, on the concept of disclosure. The premise of such regulation is that the investing public must have all material information in order to evaluate and consider whether to invest in a certain security. Commonly, all material information comes from the company and its "insiders", hence the duty to disclose material information, on the one hand, and the prohibition of trading while in possession of material information, on the other hand. However, new technologies are now challenging this belief.
Nowadays, business and financial intelligence companies are able to collect and analyse data that provides a clear picture regarding a company's financial status without breaking into any computer or committing any crime. In addition, we are all highly (and painfully) familiar with hackers breaking into corporate databases, and leaking their contents to the media and the public. This explosion of data may require regulators to seek new ways in which to incentivise market participants to invest efforts in collecting and analysing data legally before deciding on a securities trade, and at the same time, vigorously sanction anyone who tries to take a "shortcut" by using information obtained illegally. 

What Key Trends Do You Expect To See Over The Coming Year And In An Ideal World What Would You Like To See Implemented Or Changed?

It may sound like a cliché but the world is becoming smaller and smaller, and this is highly visible in the capital markets. Major institutional investors seek interesting global investing opportunities, and are not constrained to invest only in their local market. High net-worth individuals seek the advice and assistance of professional asset managers and investment advisors who may be situated in other countries, and legal and natural persons commonly open accounts with banks and brokers in foreign countries. In other words, cross-border financial activity is all over the place. On the other hand, financial regulation is still very domestic in its nature. This creates regulatory arbitrage that may be manipulated by market participants, but more importantly, this imposes unnecessary costs and creates legal uncertainties that are never good for domestic and global economies. In an ideal world I would like to see the formation of clear international regulatory standards that will enable this cross-border financial activity while protecting the investing public around the world. 

Zvi Gabbay specializes in securities law and in advising public companies, banks, investment houses and financial entities in relation to their activities in the global arena.

Over more than 18 years of practice in the fields of financial regulations and enforcement, Zvi attained an esteemed reputation for representing clients before the regulatory authorities on matters pertaining to securities laws and financial regulation, for providing ongoing legal advice to private clients and to leading corporations in relation to their capital market and corporate governance needs, as well as for representing clients before various enforcement agencies during administrative inquiries and investigations.

Zvi can be contacted on +972 3 6400 600 or by email at

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