LEGAL ASPECTS OF FINANCE Lecture 1 Introduction Case 1 Matti Rudanko

Views on the Markets Economics: markets in the context of political economy Methods of economics and business economics Finance and Accounting: pricing of derivatives, investor behavior, market efficiency, financial instruments, IFRS etc. Communication sciences (e.g. representations of finance in media), sociology etc. Classical question: why regulate the markets? Karl Marx – Adam Smith (the visible / invisible hand) – the modern competition law The special characteristics and role of financial markets may increase the need of regulation (Here:) the (combined) legal view: function of regulation in market context Legal Aspects of Finance 1

The Views of the Regulator (and Supervisor) of the Markets The views are taken from regulative provisions, either from European or national legislation, which are effectively harmonized “Financial Services policy should deliver stable, secure and efficient financial markets and ensure coherence and consistency between the different policy areas, such as banking, insurance, securities and investment funds, financial markets infrastructure, retail financial services and payment systems.” (http://ec.europa.eu/internal_market/finances/index_en.htm ) Legal Aspects of Finance 1

Focus and objectives of the course Market regulation in the context of other market structures Interaction and dynamics Need of regulation Objects of regulation Objectives of the course: see Syllabus / course information (https://mycourses.aalto.fi/course/view.php?id=16387&section=4 ) Legal Aspects of Finance 1

The Special Characteristics and Role of Financial Markets Purpose: (like that of other markets): transfer resources (funding) to where they are needed Macroeconomic view: blood circulation of national economy Requires efficiency ensured also by means of regulation Another regulatory objective: investor protection For companies, markets are a means of getting capital – for investors a means of getting profit Primary markets: collecting capital to companies Secondary markets: profit through market value increase (cf. dividends) Cf. Investment markets / Markets of corporate control Disorders affect all markets – and political economy They easily escalate on global markets Legal Aspects of Finance 1

Main Objects of Regulation in Securities Markets Law 1: Disclosure Duties Duties in conjunction with the issue of securities Information of the issuer (financial position, future prospects etc) and of the security to facilitate well-founded investment decisions Especially the prospectus duty Obligation of the issuer Regular (interim and annual accounts and account statements) and ongoing disclosure duties (any news having a material impact on the value of the security) Flagging duties (share ownership portion reaching / exceeding / falling below defined thresholds) Obligation of a shareholder Legal Aspects of Finance 1

Other Main Sets of Securities Market Provisions Rules of trading (mostly self-regulation of the Stock Exchange) Ban on market abuse Insider regulation: ban on trading on the basis of non-public price-sensitive information Market manipulation: affecting market prices in an inappropriate way e.g. by operations in the company’s own shares Public bids and mandatory redemption of minority shares Regulation of securities intermediaries (brokers) E.g. codes of conduct, protection of clients Legal Aspects of Finance 1

Overview of Course Topics (Slide Sets) Regulative Views on the Markets Slide Set 1 The Role of Regulation on the Markets Slide Set 2 Markets, Parties and Trading The Stock Exchange and Other Public Trading in Securities Slide Set 3 The Single European Financial Market Free Movements and Basics of Regulation The Supervisory Bodies Slide Set 4 Legal Aspects of Finance 1

Overview of Course Topics, cont. Banking Disruptions Caused by PSD Directive and Technology Slide Set 4a Investment Firms Legal Standards on Customer Relations Other Regulation of Investments Firms Slide Set 5 Insider Provisions: General Framework Market (Price) Distortion Own Shares and Securities Markets Slide Sets 6 and 7: Market Abuse Civil Law Liabilities on Securities Markets: Contracts, Damages Slide Sets 8 and 8a Legal Aspects of Finance 1

Overview of Course Topics, cont. The Disclosure Duties: The Duties in Issues of Securities (Especially Prospectuses) Finnish Insider and Disclosure Duty Case Slide Sets 9 and 9a Regular and Ongoing Disclosure Duties IFRS Pro Forma Information Slide Set 10 Ongoing Disclosure Duties Disclosure Duties, Insider Information and Business Secrets Slide Set 11 Legal Aspects of Finance 1

Overview of Course Topics, cont. Information Crimes Information as Property More Disclosure Duties Slide Set 12 Tender Offers (Public Bids) Mandatory Bids Slide Set 13 Legal Aspects of Finance 1

Introduction to the Course Our Approach Regulative Views on the Markets Overview of the Lectures What Else or Your Comments? Legal Aspects of Finance 1

Search of Regulation Material Links to search of material issued by (Finnish) Financial Supervison Authority, Nasdaq OMX (Helsinki Stock Exchange): see homepage of the course (https://mycourses.aalto.fi/course/view.php?id=12515 ) Links to Finnish legislation translations : http://www.finlex.fi/en/laki/kaannokset/haku/?search%5Btype%5D=pika&search%5Bpika%5D=Act+on+Investment+Firms&submit=Search Links to EU legislation: http://eur-lex.europa.eu/collection/eu-law/legislation/recent.html (by indicated search keys, e.g. document number) Legal Aspects of Finance 1

Remember these! At the end of the examination, turn in all answer sheets, including empty ones, and question sheets, if requested. Once 30 minutes have elapsed since the official commencement of the examination, no students will be let in the hall. Only examination registrants may enter the examination hall. For other examinations, including make-up examinations or examinations for self-study courses, students must register no later than 7 days beforehand. Course registration automatically includes registration for the course examination. At least this slide is shown to the students by the teacher at the start of each course. Teachers may also show the previous slide to the students if needed. Please note!If your course does not have a course examination but does have other examinations, remind your students to register for the examinations in WebOodi.

Case 1: Financial Crisis of 2008 Task: 1. Origin, Development and Escalation of the Crisis 2. Possible Causes of the Crisis 3. Role of Regulation of the Market and Its Possibilities to Prevent a Crisis

Origin, development and escalation of the crisis Summary video from Investopedia: https://www.youtube.com/watch?v=N9YLta5Tr2A Legal Aspects of Finance 1

Topics and Issues The Role of Regulation on the Markets Markets, Trading and Actors … and Supervision of them - is it needed? ”Prudential Supervision” Solvency of Financial Institutions Regulation of Financial Products Marketing Provisions etc. Monitoring Complicated and Risky Products Legal Aspects of Finance 1

EU Regulation CREDIT INSTITUTIONS: 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, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC Text with EEA relevance ( http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32013L0036:EN:NOT ) Solvency regulation of credit institutions and investment firms 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 and amending Regulation (EU) No 648/2012 Text with EEA relevance Legal Aspects of Finance 1

EU Regulation (cont.) FINANCIAL MARKETS Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II) Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 Text with EEA relevance Legal Aspects of Finance 1

EU Regulation (cont.) Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001on the admission of securities to official stock exchange listing and on information to be published on those securities 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, and repealing Directive 2003/71/ECText with EEA relevance. (”Prospectus directive”) Legal Aspects of Finance 1

EU Regulation (cont.) Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements ”Europassport” for issuers CESR’s (see slide set 4: 2 – 3) recommendations for the consistent implementation of the European Commission’s Regulation on Prospectuses N:o 809/2004 (CESR /05-054b) Legal Aspects of Finance 1

EU Regulation, Investment Funds Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (Text with EEA relevance) Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 Text with EEA relevance Legal Aspects of Finance 1

EU Regulation: Market Abuse Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC Text with EEA relevance Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive) Legal Aspects of Finance 1

Regulation (cont.) National regulation : Securities Markets Act (14.12.2012 / 746; http://www.finlex.fi/fi/laki/kaannokset/2012/en20120746.pdf ) Repeals: Former SMA (495/1989) Ch. 3 – 5 on disclosure duties Marketing and issuance of securities, duty of disclosure (SMA ch. 1 sect. 2 – 4) Act on Investment Services (14.12.2012 / 747; only in Finnish, so use:) Repeals: Act on Investment Service Companies (922/2007) FSA standard 5.2a on Securities offerings and listing Legal Aspects of Finance 1

Other Material and Further Reading Wikipedia Article: Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (http://en.wikipedia.org/wiki/Wall_Street_and_the_Financial_Crisis:_Anatomy_of_a_Financial_Collapse#Investment_Bank_Abuses:_Case_Study_of_Goldman_Sachs_and_Deutsche_Bank ) ZUFFEREY, J.-B.: Regulation of Trading Systems on Financial Markets (1997). ISBN 90-411-0679-0 Please make use of your knowledge of Finance Legal Aspects of Finance 1

Slide sets: 1 – 5, 9, 12; especially set 2 On legal liabilities: set 8 Case 1: Slides Slide sets: 1 – 5, 9, 12; especially set 2 On legal liabilities: set 8