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Enron Mail |
Mark,
Further to Mark Haedicke's e-mails, for your information please see below my e-mail of yesterday evening to Mark Haedicke and Scott Sefton re the impact of English law on a potential Equity trading desk based in London. Kind regards Mark ---------------------- Forwarded by Mark Elliott/LON/ECT on 02/03/99 11:41 AM --------------------------- Mark Elliott 02/02/99 06:33 PM To: Mark E Haedicke/HOU/ECT@ECT, Scott Sefton/LON/ECT@ECT cc: Subject: Proposed London Equity Trading Desk I have reviewed the above proposal (which includes having had some in-depth conference calls with Slaughter & May, London) and conclude that the project is technically and legally viable provided that the points listed below are dealt with. Mark, once you have read this note, if you would like to discuss the contents with Scott and me, please do not hesitate to give us a call. SFA Authorisation and Structure On account of the potential frequency and size of trading (even on an execution-only basis for ECT Investments Inc), the London Desk should be authorised by the SFA. The personnel involved in the activity should be registered with the SFA as, at least, Securities Representatives, and preferably as General Representatives. Accordingly, subject to Tax Department's input, the London traders should be located in EEFT (already SFA-regulated) which would act as arranger or agent for the existing Houston-based equity trading corporation, ECT Investments, Inc (the latter as principal). Subject to Tax and other internal considerations, it would also be possible for EEFT to act as agent to do this business for, as principal, either ECTRIC, the proposed replacement vehicle for ECTRIC, or a new UK unregulated entity (the latter would apply if a UK book was required). A UK entity, as principal, would be "unregulated" if it was a purely passive booking company. Provided that the ultimate principal is either ECT Investments, Inc., ECTRIC or an unregulated UK principal, there should not be any UK regulatory capital requirements. The SFA would need to be informed in advance of our intention to have an equity trading capability in London and EEFT's SFA business profile would need to be extended to cover both arranging and dealing as agent in respect of equities. Transaction Reporting As the business would be SFA regulated per the above, SFA Rule 5-49 would require all transactions to be "Transaction Reported" - for pure cash equity business (wherever the equities are listed) this would be accomplished by computer-entry of trade details which would then download to one of the London Stock Exchange's ("LSE's") systems known as either "SEQUAL" or "CHECKING". The purpose of such reporting is not only to enable the LSE and SFA to establish daily market volumes, etc., but also, for example, to provide the relevant information to the LSE's surveillance unit which actively monitors all trades for signs of Insider Dealing. Systems' impact On the above structure, there should be no extra systems' requirements, except:- PC screens for the traders having feeds of market quotes / market information (e.g., Reuters, Telerate, etc): potentially a computer-link for settlement purposes a computer-link for the Transaction Reporting of executed deals to the LSE (see above) a computer-link to produce exception reports of executed deals to enable a Compliance Department to monitor for Disclosable Interests in Shares (see below) a computer-link to produce reports of executed deals for monitoring against the Watch and Restricted Lists (see Insider Dealing below) Accountants, e.g., Arthur Andersen, would be the best placed to advise on the correct form of computer-links, especially those for Transaction Reporting purposes. Disclosure of Interests in shares Re UK listed companies there are the following disclosures to be made of equity interests:- S. 198 Companies Act '85 - acquisition of 3 % interest or more, or disposal to below a 3% interest, or acquisition of each whole % above a 3% interest of a UK Public Co's voting capital requires to be disclosed to the company. Group interests / concert party interests are aggregated to arrive at the thresholds and "interest" includes a right or option to acquire shares. Substantial Acquisition Rules - acquisition of over 15% interest in a UK public company requires separate disclosure to the Company and, if listed, to the LSE. Rule 9 Takeover Code - acquisition of 30 % or more of UK public company's voting shares leads to a requirement to make a cash offer for the remainder. S. 212 Companies Act '85 - UK public companies can request at any time an entity to disclose to the company particulars of their, and other persons', interests in the company's share capital, including such details for the last three years. Rule 8.3 Takeover Code - during an "offer period" relating to a UK public company (and the offer is a "securities exchange offer"), persons owning or controlling directly or indirectly 1% or more of relevant securities of that company (including cash-settled derivatives) must disclose such interests to the Take-Over Panel. Please note that there may be similar rules in other jurisdictions, depending on where the relevant equities are listed - indeed in some jurisdictions there may be prohibitions on foreign ownership of equities. Insider Dealing Looking just to the UK legislation (The Criminal Justice Act 1993), the various criminal offences of Insider Dealing are committed, basically, when an individual has Inside Information (meaning unpublished price-sensitive information) concerning the securities of an entity or entities (whether UK or non-UK) which are officially listed in any State within the European Economic Area or admitted to dealing, or quoted, on a "Regulated Market" (e.g., including the major European markets, NASDAQ, etc). Please note that "price-sensitive" means likely to have a significant effect on the price of any securities - not just those of the entity or entities in respect of which one has the knowledge; and "securities" includes shares, debentures, options to subscribe for shares / debentures, depository receipts, futures and CFDs. Once in knowledgeable possession of insider information, the offences are commited if one deals in price-affected securities in relation to that information, or encourages another to so deal or discloses the information. The offence is punishable by imprisonment and / or fines. The offences are highly technical and there are certain defences available. The manner in which to try to prevent the internal commission of the offences is to put in place, simply, "established and effective" Chinese Walls between those individuals who would be involved in the Equity Trading facility and others in within the Enron Group who may have such inside information, to prevent the potential flows of Inside Information between those with such information and the Equity Traders in London. Both I and Slaughter & May feel that potentially replicating in London the Enron Chinese Wall policy actively followed in Houston could suffice in this respect as it is generally felt that the US requirements should be at least as stringent as those required in the UK. Alan Aronowitz is in the process of sending me Houston's policy in this regard for review and upon receipt that policy will be reviewed accordingly. However, the relevant Chinese Walls would need to be put in place for Insider Dealing purposes between, in my and Slaughters' views, (a) on the one side, the Equity Traders and (b) on the other side, originators and traders, and persons involved in any corporate finance, M&A, Joint Venture, and financing activity. Not only would the Chinese Walls need to be implemented, but also they would need to be actively monitored by a Compliance Department in London to ensure that they were being observed and effective. In addition to the Houston Chinese Wall policy, there should be implemented both a "Watch List" and a "Restricted List" procedure (I understand the latter already exists and would need to be combined with additions to such list in London ) - the Watch List does not actively prevent trading in relevant securities, but is an intermediate step before a stock is placed on the Restricted List: i.e., companies in which Enron is involved in sensitive transactions would be placed on such a list and an internal Compliance Department should then actively monitor for any unusual deals by the Equity Traders (e.g., by volume etc) in stocks of the Companies on such list. If any irregular trading activity is then spotted - it could be internally investigated. Obviously, an internal procedure would need to be established to gather information on sensitive transactions so that they could be placed on the Watch / Restricted Lists as appropriate. Other Confidential Information In addition to any specific Insider Information, various Enron Group entities will be party to specific Confidentiality Agreements (or other forms of Agreement, e.g., Master Agreements, containing confidentiality clauses) with third parties, pursuant to which the Enron entities may have confidentiality obligations to those third parties and which may prevent the contracting Enron entities from disclosing certain information to affiliated Enron entities. Obviously, in order to comply with our various obligations in this regard we would need either to check each contract or ensure that Enron personnel were aware of their obligations in this regard and never disclosed to the London Equity traders any information covered by the confidentiality obligations. The Watch List could be used to log, for monitoring purposes, companies to whom Enron owes confidentiality obligations. Both with regard to Insider Information and this form of confidential information, employees would need to be actively trained to ensure that only generally available market sentiment on a third party could be passed on to the London Equity traders and not more specific information. Compliance Department If this proposal moves ahead, my suggestion is that Enron in London would need to hire an experienced Compliance professional for the following purposes:- active implementation of, review of, and consistent monitoring of, the Chinese Wall policy; active monitoring of executed deals against Watch and Restricted Lists; active monitoring of executed deals for Disclosable Interests in Shares in the UK and similar rules and prohibitions in other jurisdictions; handling SFA and LSE queries on Transaction Reporting; handling potential LSE and Takeover Panel queries on executed Transactions; and running continuous training courses for Enron personnel on Insider Dealing, confidentiality obligations, etc. In addition, such person could have responsibility for the implementation of, monitoring of, and ensuring compliance with, SFA Conduct of Business Rules and Moneylaundering compliance, and any relevant exchange rules, firm-wide in London across all of Enron's business - e.g., its OTC Derivatives' business. Kind regards Mark
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