Repurchase or early repayment by intermediaries of bank securities - Consob clarifies rules of conduct towards clients

Publication | March 2012

Consob, the Italian securities exchange supervisory authority, has published an official communication (Communication no. DIN/12010034 of February 2012) following numerous enquiries which it has received regarding the duties of intermediaries in the context of the repurchase by banks of their securities (subordinated bonds and similar debt securities of any description) (buyback transactions).

The buyback transactions in question are generally characterized as offers to “qualified investors” or to the owners of quoted securities having a nominal threshold value of over €50,000 and as such are exempt from the preparation of a prospectus under relevant Italian laws. Banks often enter into a buyback transaction in order to reduce their debt exposure and improve their capital adequacy position.

In its communication, Consob warned that in order to protect the banks' retail customers and avoid conflicts of interest, certain precautions must be taken prior to a buyback transaction. In particular, Consob stated:

intermediaries who hold in their custody and administration financial instruments, have a duty to take reasonable action, taking into consideration the duration of the offer to retail investors, to inform all holders of the instruments themselves of the planned buyback, even if the latter cannot directly take part in the offer, about the terms and conditions of the planned transaction.”

In addition, Consob stated that, prior to recommending to any client to participate in a buyback transaction, the intermediary has a duty to consider, based on a “rigorous assessment” and “predetermined procedures”, whether the recommendation is appropriate and also what the consequences would be should the client not participate in the offer.

Consob further warned that the above-mentioned precautions require special attention and careful application by the intermediary any time the planned buyback transaction may possibly give rise to a conflict of interest with retail clients (chiefly in the event that issuer/offerer belong to the same group of the intermediary) and called on management teams at intermediaries to put in place requisite compliance procedures to ensure “adequate and full implementation” of these conduct of business rules.

The full text of Consob Communication no. DIN/12010034 of 02.09.2012 can be found on the Consob website.