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© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

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Jochen Kindermann Lennart Dahmen

London, 09 March 2017

BaFin’s sanctioning practice


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Background/Timeline

Increasing number of European Directives allow more revenue-based sanctions: – Transparency Directive 2 (up to 5% of annual revenues) – Anti-trust/Cartel (up to 10% of annual revenues) – Data Protection (up to 4% of annual revenues) – Market Abuse (up to of 15% annual revenues)

Risk of sanctions can threaten existence of companies – Determined on a group-wide basis – Less predictability – Reserves?

Capital market offences: Guidance from the regulator


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Germany: Relatively calm waters

Grace period: No substantive sanctioning procedures since TD2.

Regulator was relatively lenient in the recent past; willing to work with market participants.

Regulatory activity has picked up recently: – Voting right disclosures: BaFin is currently actively pursuing pre-TD2 cases. – Net short selling: Increased scrutiny. – Regulator makes use of naming & shaming. – Sanctioning Guidelines 2017.


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Proceedings concluded with a fine

49%

12%

9%

7%

5%

4% 2% 1%

1% 1% 9%

notification requirements/ publicationobligations (252)financial reports (62)

information obligation (47)

Ad-hoc-publicity (37)

market manipulation (24)

Code of Conduct WpDU (18)

takeover (12)

reporting requirements (7)

uncovered short sales (5)

Directors' Dealings (4)

other (43)


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Highest overall fine imposed on a company

30,000

112,000

100,000

10,000

130,000

50,000

32,000

160,000

15,000

215,000

24,000

12,500

prospectus (WpPG)

takeover (WpÜG)

financial reports (sec. 37v et seq. WpHG)

Code of Conduct Investment firms

uncovered short sales (sec. 30h WpHG)

information obligations (sec. 30b et seq. WpHG)

publication obligations (sec. 26 et seq. WpHG)

notification requirements (sec. 21 et seq. WpHG)

market manipulation (sec. 20a WpHG)

Directors' Dealings (sec. 15a WpHG)

Ad-hoc-publicity (sec. 15 WpHG)

reporting requirements (sec. 9 WpHG)

executable order (sec. 4 WpHG)

3,25 Mio.


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Background


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Sanctioning in Germany – an introduction

Principle remains – also in light of revenue-based sanctioning

Section 17 (3) of the German Act on Regulatory Offences: The significance of the regulatory offence and the charge faced by the perpetrator shall form the basis for the assessment of the regulatory fine. The perpetrator's financial circumstances shall also be taken into account; however, they shall, as a rule, be disregarded in cases involving negligible regulatory offences.

BaFin: Three steps to determine sanction amount: 1. Determine ceiling and base amount; 2. Consider circumstances in both directions; and 3. Take financial circumstances into account.


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How BaFin will determine a sanction

sanction ceiling

Base amount


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Adjusting of the base amount

General considerations

Mitigating factors: – Negligent or careless breach – Confession – Contributing to solution – Promise to improve – Length of procedure

Aggravating factors: – Repeat offence – Special prevention

BaFin also provides guidance for factors for each type of breach


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Example: Voting right disclosures

Brave new world

Before TD2: – Sanctions up to EUR 1m per breach; incorrect disclosures counted as two

breaches. – Automatic discount for unintentional breaches. – Sanctions were confidential.

After TD2: – Sanctions up to the higher of (i) EUR 10m, (ii) twice the economic benefit or

(iii) 5 per cent of annual turnover. – No automatic discount for negligence. – Mandatory naming and shaming.


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Previous “record-setting fine” at EUR 3.25m

Imposed for voting rights pre-TD2

Subject to widespread press coverage, both in Germany and abroad.

BaFin “named and shamed” on its website unique instance even though legal framework generally allowed publication of sanctions.

Purpose of sanctions two-fold: – perceptible appeal to comply with legal duties – clear signal to all market participants to

observe the capital market rules

Relatively low ceilings and predictable fines


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Sanctioning Guidelines 2013

BaFin had published Sanctioning Guidance (2013) to provide guidance for “standard cases”.

The Guidelines were based on over ten years of experience of the BaFin.

BaFin aimed to define the amount of the administrative fines to be imposed for certain common, regularly occurring breaches. – Tailored for “standard breaches”. – Only applied to certain breaches.

But: Negotiations and settlement talks.

Procedure: Fine determined by issuer size and circumstances.

Codified administrative practice


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Example: Breaches of voting right disclosures

Might have been a bargain… Previous Ceiling: EUR 500k for reckless breaches

BaFin was reluctant to fully utilize frame


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Sanction Guidelines 2017


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Introduction

BaFin published the Sanction Guidelines at the end of February 2017 – around fifteen months after TD2 came into effect.

Guidelines also cover “extreme” cases.

Still no clarity on revenue-based sanctions.

Sanctioning Guidelines 2017 cover: – Publication of insider information (MAR) – Voting rights disclosures (TD2) – Financial reporting (TD2)

Absent: Insider Trading, Market Abuse

Read our article on elexica.

http://www.elexica.com/en/legal-topics/asset-management/220217-bafin-publishes-revised-sanctioning-guidelines

http://www.elexica.com/en/legal-topics/asset-management/220217-bafin-publishes-revised-sanctioning-guidelines


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Sanctioning Guidelines 2017 in a nutshell

More granularity on issuer groups and circumstances of breaches

Higher base amounts

BaFin provides guidance for: – Natural persons; and – Companies not sanctioned on revenue basis

Sanctions for natural persons could be attributed to companies only limited room for revenue-based sanctions?

Limited clarity for revenue-based sanctions.


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Attributing fines to the company

Fines may be imposed against the company where the offence was committed by: – legal representative, – chairman or member of the executive

committee – partner authorised to represent a partnership – the authorised representative – other senior appointee

Failure to establish efficient organizational structures.

“Scapegoating” may be advantageous

FCA consequences?


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More granularity for issuer groups

Two new categories; based on market cap.

Issuer categories based on market capitalisation

Issuer group

A B C D E F

Market cap/EUR

>20bn >4bn to 20bn >500m to 4bn >100m to 500m >10m to 100m up to 10m

Presenter

Presentation Notes

Changes: Previously: Very wide groups (Issuer B: EUR 500m to EUR 4bn; Issuer C: EUR 10m to EUR 500m) Now: more reasonably sized groups – Range up to EUR 500m is now made up of three issuer groups instead of just two) DAX 30: Roughly one third of issuers qualify as “Issuer B” Deutsche Lufthansa AG with EUR 6bn to SAP with approx. EUR 110bn; the other issuers are “Group A”. MDAX 50: Only two issuers qualify as “Issuer A” (Airbus and Steinhoff), index also includes “Issuer C” entities (LEONI AG with approx. EUR 1.3bn). SDAX Includes Issuer D


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More granularity on circumstances of offences

Offences are now either “most severe”, “very severe”, “severe”, “medium” or “easy”.

In determining circumstances, BaFin will consider: – Kind/manner of breach; – Effects of breach on capital markets; and – Duration/length of breach.

BaFin will weigh circumstances to determine classification: – Intentionally vague; – Wide discretion for the regulator; – Difficult to review/argue.


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Sanctions: Voting right disclosures (I)

Breaches of disclosure obligations (for legal entities)

Amount in EUR Issuer group

A B C D E F

Category of offence

Most severe 6,000,000 5,000,000 4,000,000 3,500,000 3,000,000 2,000,000

Very severe 5,000,000 4,000,000 3,500,000 3,000,000 2,500,000 1,500,000

Severe 4,000,000 2,000,000 1,200,000 600,000 400,000 300,000

Medium 2,800,000 1,400,000 800,000 400,000 300,000 200,000

Easy 1,400,000 700,000 400,000 300,000 200,000 100,000


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Sanctions: Voting right disclosures (II)

Breaches of disclosure obligations (for natural persons)

Amount in EUR Issuer group

A B C D E F

Category of offence

Most severe 1,200,000 1,000,000 800,000 700,000 600,000 400,000

Very severe 1,000,000 800,000 700,000 600,000 500,000 300,000

Severe 800,000 400,000 240,000 120,000 80,000 60,000

Medium 560,000 280,000 160,000 80,000 60,000 40,000

Easy 280,000 140,000 80,000 60,000 40,000 20,000


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Sanctions: Voting right disclosures (III)

Considerations for BaFin

BaFin will, when adjusting the base amounts, consider: – Length of delay – Scope of errors, effect of breach on statutory

information requirements; – Scope of change in disclosed holdings; – Triggering event; – Group structures; – Effects on capital markets; and whether – Administrative measures were required to

remediate the issue.

Factors can lead to higher or lower fines


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Revenue based sanctions (I)

Guidelines provide little guidance…

Example: Issuer with a market cap > EUR 20bn Provision of financial reports Ad-hoc publication

Annual Revenue (example) EUR 50bn EUR 50bn

Maximum sanction amount

EUR 2.5bn (5% of the annual revenues)

EUR 1bn (2% of the annual revenues)

Base amount for most severe offence

EUR 2bn

EUR 800m


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Revenue based sanctions (II)

Simple formula? Hopefully not Example: Voting rights breach, annual revenue 10bn

– Ceiling amount: 5% 500,000,000 – Application of same percentages as for nominal amounts?

Amount in EUR

Issuer group

A B C D E F

Category of offence

Most severe 300,000,000 250,000,000 200,000,000 175,000,000 150,000,000 100,000,000

Very severe 250,000,000 200,000,000 175,000,000 150,000,000 125,000,000 75,000,000

Severe 200,000,000 100,000,000 60,000,000 30,000,000 20,00,000 15,000,000

Medium 140,000,000 70,000,000 40,000,000 20,000,000 15,000,000 10,000,000

Easy 70,000,000 35,000,000 20,000,000 15,000,000 10,000,000 5,000,000

Presenter

Presentation Notes

BaFin applies “considerations” of nominal amounts to revenue-based sanctions: Example seems to indicate similar percentages; Outcome absolutely unclear. Issuer categories based on market capitalisation Market cap/EUR A>20bn B>4bn to 20bn C>500m to 4bn D>100m to 500m E>10m to 100m Fup to 10m BaFin: “Determining of revenue-based sanctions will be influenced by considerations for table amounts”. Percentage? Easy Formula? Example: Most severe breach for Issuer A for provision of financial reports. Table: Nominal amount at 80% of ceiling amount. BaFin calculation: base amount for revenue-based - 80% of ceiling. Likelihood?


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Naming and shaming


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Publicity risk Now mandatory; already prior to enforceability.

BaFin is making ample use of powers.

Can also be applied to threats of fines.

Well known concept in other countries…


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How to prepare for sanction proceedings?


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Things to do

Pre-Sanction: – Documentation & Policies; – Clarification of responsibilities; – Monitoring and oversight.

Prepare for sanction proceeding: – Hearing letter; – Legal review; – Negotiation/Settlement; – Sanction Notice; and – Appeal?


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Jochen Kindermann Partner T +49 69 9074 5443 E [email protected]

Lennart Dahmen Supervising Associate T +49 69 9074 5428 E [email protected]

This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name “Simmons & Simmons” or one or more of those practices as the context requires. The word “partner” refers to a member of Simmons & Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP’s affiliated practices. For further information on the international entities and practices, refer to simmons-simmons.com/legalresp. Simmons & Simmons LLP is a limited liability partnership registered in England & Wales with number OC352713 and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address.

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