UK and US Financial Law on Bond Securities
Advise on the regulatory issues involved both under US law and EU/UK law. In particular, specific advice is requested on selling bonds to institutional investors in the US as well as US bank offices overseas.
Bonds are a critical source of assets in financial institutions. Many multinational organizations and companies are dependent on selling securities like shares to investors to be in a position to operate efficiently. Bonds and shares are the most common sources of financing to many companies that are sold in public (Fabozzi, 2008). However, the issuance of bonds and shares is governed by financial laws, which are different from one country to the other. One of the most common types of bonds that companies prefer in investment is institutional bonds, which involve large organizations such as banks rather than individuals. The requirements to issue institutional bonds in the US are different from the requirements under UK law. RAC is a company in S. America and wishes to issue bonds to institutional investors in Asia and Europe to facilitate its operations. The company also wishes to issue institutional bonds in the US. The company must ensure that it adheres to the regulatory requirements under US and UK law if it can issue the bonds successfully.
The US law requires that every company that wishes to issue bond securities in organizations based in the United States file its registration statement with the SEC. Securities exchange commission is the Federal Organization that is mandated with regulating the financial markets in the United States (Aguilar, 2017). The Federal securities law requires that all companies ensure they are able to file their financial reports with SEC. The commission’s primary purpose is to protect investors, maintain fair markets, and facilitate capital formation. The Securities Act was passed in 1933 by Congress after the stock market collapsed in 1929 (Aguilar, 2017). RAC must be ready to file the registration statement with SEC if it is going to issue institutional bonds to US companies. The US law mandates that all organizations file their registration statement to prove that their securities are safe.
RAC also has an interest in selling bond securities to US banks offices that are operating oversee. US banks operating overseas operate under international banking law (fdic.gov, 2021). The banks compete with other banks in the host country and must ensure favorable conditions for their customers. The US banks operating oversee the privilege of taking advantage of the favorable regulation laws in the host country. RAC can sell institutional bonds to US banks that are operating in other countries without issuing registration statements to SEC, provided the host country does not require the registration statement. RAC can take advantage of the US banks operating in foreign countries and sell the tranche of bonds without the registration statement.
The UK/EU law also needs some regulations to sell the bond securities to institutional investors. Under UK law, the securities exchange commission registration statement is not required. However, irrespective that the UK Law does not require the registration statement filing, there are regulations that govern the selling and offering of debt securities. The main regulatory body that the debt securities need to ensure compliance is the Financial Services and Markets Act 2000 (Delgado & Morris, 2021). The organization selling the bond securities needs to ensure effective compliance with FSMA. EU law established a regulation that has been in operation since 21st July 2019, which requires securities offering in European Economic Area regulated by the prospectus Regulation. The law requires a company that aims to sell securities to the public to avail the prospectus in the European Economic Area. The other requirement is the securities’ admission to trading in a regulated market in any member state or the UK. The International Capital Market Association also requires organizations to complete the standard form selling restrictions for offers made in the UK (Delgado & Morris, 2021). The UK law supplements the requirements under the EU law by requiring compliance with the ICMA. The regulating body requires completion of the standard form UK selling restrictions for all debt securities. ICMA recommends that issuance of debt requires no breach of the requirements of Section 21 in FSMA. RCA needs to understand that the issuance of bonds to institutional investors under the UK/EU law will not demand the provision of the registration statement but must ensure compliance with the requirements laid by ICMA and FSMA. The company should be prepared to ensure that all its prospectus have been sold in public.
It has requested its proposed lead manager, Rheingeld und Valkure Banken (RUVB), a major German bank that will lead manage the issue, that the bonds be issued in definitive form. RUVB has advised that bond investors in Europe and Asia prefer dematerialized issues and are wary of definitive issues. RAC requires your advice on what legal advantages if any, attach to dematerialized issue as compared with definitive issues.
Bonds can be issued in either definitive form or through dematerialization. The issuance of bonds has continued to advance as technology advances. The definitive issue involves offering physical certificates to investors. The investors keep the physical certificates as proof of their investment in the organizations. However, with the advancement in technology, there has been increased use of dematerialization where the physical securities are transmitted to electronic format (Vos & Newell, n.d.). Dematerialization often has many advantages, such as reducing the cost of operations and increasing investors’ confidence. The dematerialized issue also has legal advantages. The legal advantage of the dematerialized issue is that it is not easily forged. Hence, it is safer than a definitive issue and can be proven in case of any forgery.
The bonds are to be issued under a Fiscal Agency Agreement. RAC requires your advice on the default mechanisms in such a structure and the requirements for restructuring the bonds under the terms of the bonds if that becomes necessary in the future. The bonds will be issued under ICMA standard terms under bond documentation subject to English law.
A fiscal agency agreement is one of the most recognized terms that bonds are issued to the public. The fiscal agency agreement involves having an agent who is the issuer of the bond (Buchheit, 2018). A fiscal agent is not able to transact on behalf of the issuer of the bond. An agent cannot enforce or negotiate any terms of the bonds regarding g any form of amendments. The fiscal agency agreement assumes that there will be no need to change the bond terms since the bonds will never go into default, and there is no need for any trustee who would protect the interest of the bondholders. Under the Fiscal agency agreement, the fiscal agent can receive payments such as interests on the investment on behalf of the bondholders. In this case, I would advise RCA not to accept the FAA agreement because it limits the ability to modify the bond agreement, which might be essential in the future. The company should prefer issuing the bonds under trustee indenture where it is possible to change and restructure the bond conditions and terms.
Under UK law, the International Capital Market Association (ICMA) will further require additional regulations if the bonds are to be issued by agents who are not authorized to transact on behalf of the investor. The ICMA further requires that managers operating under the FAA agreement agree that commercial papers are offered to investors who are only involved in holding, acquiring, disposing, and managing investments (Delgado & Morris, 2021). ICMA further demands that the commercial papers have a minimum of GBP 100,000 or equivalent in other countries. The condition by ICMA might limit the institutional investors that RCA is to issue bonds if it operates under FAA agreement. RCA should consider changing its bond issuing agreement to make it more favorable for all kinds of institutional investors.
RAC also has requested your advice on the issue of termination of the bond issue after launch and before the closing date and, in particular, what rights it has in the decision to terminate.
Bond issuing under the UK law takes place in different stages. The first stage is pre-launch, where the bond issuer decides the terms to issue the bond and learns about all the legal barriers that exist on the bond issue. It involves structuring the bonds and determining the terms to issue the bonds (Uk.practicallaw, 2021). The second stage involves the launch stage, which involves the issuer’s announcement on issuing the bond. The issuer must advertise its bond unless there are specific investors that are to buy the bonds. The closing stage involves signing the agreements and paying for the bonds by the bondholder and issuer. However, bond issuing can be terminated after launch and before the closing date. The issuer and bondholder have the right to terminate the bond issue if the term of the bonds is not favorable to either party. RCA is the bond issuer and can terminate the bond if the prospective bondholder fails to meet the required standards. Secondly, the RCA being the bond issuer, has the right to change the bond terms to the more favorable ones.
Aguilar, R. (2017). Securities and Exchange Commission. Encyclopedia of Public Relations. https://doi.org/10.4135/9781452276236.n443
Buchheit, L.C. (2018). Trustees versus fiscal agents for sovereign bonds. Capital Markets Law Journal, Vol. 13, No. 3. http://doi:10.1093/cmlj/kmy012
Delgado, A. & Morris, T. (2021). Debt capital markets in the UK (England and Wales): regulatory overview. Retrieved from https://uk.practicallaw.thomsonreuters.com/7-525-4130?transitionType=Default&contextData=(sc.Default)&firstPage=true
Fabozzi, F. J. (2008). Bonds: Investment features and risks. Handbook of Finance. https://doi.org/10.1002/9780470404324.hof001021
fdic.gov (2021). International Banking. Retrieved from https://www.fdic.gov/regulations/safety/manual/section11-1.pdf
Uk.practicallaw. (2021). Bond issues: step-by-step guide. Retrieved from https://uk.practicallaw.thomsonreuters.com/1-505-0428?transitionType=Default&contextData=(sc.Default)&firstPage=true
Vos, R. O., & Newell, J. (n.d.). Dematerialization. Green Business: An A-to-Z Guide. https://doi.org/10.4135/9781412973793.n37