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Israel Securities Authority approved guidelines forbidding investment advisers to accept bonuses and incentives from producers of financial products


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The new guidelines approved this week by the ISA, state that: Investment adviser is precluded from accepting bonuses and incentives from producers of financial products, or their representatives, regardless of whether the incentive is personal or distributed to all employees of the branch where the aforesaid adviser is employed.
On March 3, 2006 the plenum of the ISA had authorized proposed amendment to the Securities Law, pertaining to disclosure of the authorization process related to bonuses awarded to senior officials and principal shareholders in reporting corporations. According to the aforesaid regulations, periodic reports of companies should contain disclosure regarding the extent of bonuses which senior corporate officers and principal shareholders are about to receive during the reporting period. The guidelines approved by the ISA, this week, complete the aforesaid regulations and deal with the substance of the periodic reports as far as bonuses to senior corporate officers are concerned.
The guidelines require all those responsible for authorization of bonuses to senior corporate officers, to carefully examine the bonus and its components in order to be able to make on informed decision. In order to make this informed decision, those involved in authorizing the bonus have to have all the relevant information at their disposal. Moreover, since the aforesaid information is also important to the investing public, it must be made public. At the time of authorization, the company’s apparatus, authorizing the bonus, must have complete and accurate information pertaining to bonuses brought to their authorization. This information, pertaining to wage and bonus’ stipulations of senior corporate officers, points to the use made of company’s resources and informs investors regarding the data included in financial reports that affect them, it also provides them with information on decision making processes taking place within the company: considerations, taken into account in extending said bonuses, connection between those considerations and company’s financial situation, and the contribution made by the senior corporate officer, for whom the bonus is intended.
The guidelines stipulate that reporting companies must provide detailed information regarding the authorization of bonuses to senior corporate officers, in their immediate reports, including all details related to contracts of said officers, the scope of their jobs, length of their contracts as well as
qualitative and quantitative components of their pay, including disclosure pertaining to bonuses for company’s business performance and attainment of goals, bonuses in securities and retirement bonuses. In this framework the companies will clarify the connection between the apparatus, the contribution of the officer receiving the bonus to the company, and does the bonus relate to the aforesaid contribution. For example, is a new senior executive office entitled to bonuses pertaining to transactions and profits created by the company prior to his taking the job? As an example, the guidelines bring up a scenario where a company appointed a new CEO, who will be entitled to the annual bonus, at a fixed rate from the company’s net profits, if the net profit in the said year is 5% higher by comparison to the profit generated in the previous year. During a three year period, prior to the appointment of the new CEO, the company’s net profit rose by 7% annually, and it is expected that during the said year the net profit will also rise by 7%, providing the volume and character of the companies present activities will continue (without any particular activities being initiated by the new CEO). Thus, the CEO will, in fact, receive a grant which is not a reward for his contribution to generation of profits, but a kind of “automatic” bonus ingrained in the existing situation, and the company has to disclose this information.
Also, according to the guidelines – arguments in favor of extending the bonus and other premiums paid to a senior corporate officer through other companies in the group, disclosure of sums to which the aforesaid official is entitled according to the system of benefits approved for him in accordance with the last financial report and the data regarding the year prior to it, as well as information pertaining to changes that occurred in the terms of tenure and employment of senior corporate officers – should be published.
To dispel any doubt, the ISA would like to stress that the guidelines are not intended to provide a sealed and comprehensive list of all details, pertaining to the authorization of bonuses to senior corporate officers, which have to be presented as part of the immediate report and that corporations must include the required information and all other information, in said immediate reports, that might be of importance to a reasonable investor, including information not detailed under these guidelines.
The ISA would like to stress the provisions of section 278 of the Companies Law, which stipulate that at the time of approving the bonus in the auditing committee or at the board of directors’ meeting – the director who has a personal interest in the aforesaid approval shall not be present at the discussion. In case most directors have personal interests in the approval of the transaction, the aforesaid director is entitled to be present and participate in the voting, according to the provisions of the law, and the agreement will be brought up for authorization before the general meeting.
The ISA would like to clarify that – examination of personal interests in authorization of contracts will be done according to circumstances (including circumstances related to stipulation of bonuses and the process of their authorization). Furthermore, coincidences of time proximity andor coordination in authorization of bonuses to a number of senior executive officers, accordingly, might raise questions of personal interests regarding each one of them separately, as far as the authorization of bonuses is concerned.

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