Israel Securities Authority Demands Being Granted Authority to Supervise Underwriters and Distributors

For the first time, the Israel Securities Authority has published Sentencing Guidelines for Administrative Procedures which contain the considerations guiding its determination of sanctions for individual violators and corporations in an administrative procedure.

One goal of the new guidelines is to advance a standard and equal punishment system that creates far more certainty for alleged violators facing administrative procedures. For the first time, the administrative proceedings by the ISA will be regulated similarly to criminal proceedings.

Another stated goal is to encourage individuals and corporations to reach an enforcement arrangement as early as possible, as the new Guidelines set out more lenient enforcement tools in the early stages of the proceedings.  As noted below, however, this is offset by the ISA’s consideration of deterrence as a primary factor in determining sanctions for violations.

The New Guidelines’ Primary Provisions:  

The new guidelines are based on the practice developed by both the ISA and the Enforcement Committee at the ITA regarding the considerations that must be taken into account when imposing enforcement authorities. In order to promote the goal of harmony between the processes of executing sentencing-discretion in both administrative and the criminal proceedings, the new guidelines includes two stages of review.  In the first stage, the sanction’s range is determined. After, in the second stage, the sanction is set, but only from within the applicable range.

In the first stage – determination of the penalty range – three factors should be considered:

1. Examination of the “facts constituting the violation” – These include the type of violation committed; whether the violation was stemmed from a motivation beyond ordinary negligence; or whether the violation resulted from primarily technical errors.

2. “Other factual circumstances proven in the tribunal’s hearings about the violation” – The severity of the specific violation should be examined through a range of circumstances not counted among the elements of the violation, but which are related to the commission of the violation, but do not include personal circumstances. Examples include scope of the violation, the profit (or avoidable loss) generated, and the harm caused. In addition, other elements to be examined include whether the violation was committed systematically/pursuant to sophisticated planning, the status of the violating corporation or individual, and the implementation of an effective internal enforcement plan in the corporation.
3. Deterrence, both in terms of the individual and the public – The new guidelines consider deterrence as a significant and important consideration, and even criticizes the fact that in criminal law this is only the fourth most important consideration in sentencing.

In the second stage – determination of the “penalty” (as the new guidelines refer to administrative sanctions), the following factors are considered:

1. Whether or not there were previous violations.
2. The actions were taken by the violator upon discovery of the violation.
3. The violator’s personal circumstances. If, for example, the corporation or the individual violator were in grave financial difficulties, it would be possible to significantly reduce and even eliminate the actual penalty.
4. Mitigating factors. In imposing a sanction, consideration should be given to any material negative implications caused to the violator as a result of the violation, such as termination of employment.
5. Another consideration for setting the sanction within a certain range is the ISA’s policy concerns. This is a catch-all section, designed to provide the ISA with flexibility to set the appropriate sanction for each individual case. An important development in this context is the ISA’s recognition of the reciprocity between a financial sanction and a violator being barred from holding a certain office for a set period. Thus, a violator in financial trouble may apply to reduce his fine in return for extending the period barring him from acting as corporate officer or director. On the other hand, a violator with a pivotal role in a public company may apply to shorten the ban in return for an increased fine.

Finally, an important part of the new guidelines is that as an explicit policy, the ISA is willing to incentivize violators to agree to an enforcement arrangement as soon as possible in the proceedings. The new guidelines even detail the amount of the reduction (“discount rate a violator can receive based upon the timing of the settlement and the extent of the violator’s admission:

• A 30% discount rate will be given if the violator fully admits to the facts and the violations.
• A 15-20% discount rate will be given if the violator fully admits to the facts ,but does not admit that they constitute a violation.
• In instances where only partial admission is given, and there is no acknowledgment of the violation, no discount shall be given.

In our view, the great advantage of the ISA’s new guidelines lies in the violator’s ability to calculate his strategy and plan ahead. A violator wishing to reach a settlement would have to make a decision as quickly as possible to receive the highest discount rate. The concern, of course, is that the violator’s desire to receive a greater discount will lead to rash decisions not based on the evidence in the case. This is a considerable flaw in the ISA’s new guidelines, particularly when most cases include voluminous evidence to be considered, and the resources required to process the case are no less than those required in criminal proceedings. 

Other flaws in the new guidelines lie in the fact that, inherently, it skews toward aggressive sentencing. As the ISA has determined that the primary purpose of the new guidelines is deterrence, this may lead to excessive sanctions in administrative proceedings. Some may even say this is already the case today, with high fines estimated at hundreds of thousands of NIS (without the possibility of indemnification or insurance) being imposed. In addition, a ban on serving as an officer, ranging from between several months to up to five years, is also imposed and can significantly compromise a violator’s earning potential.

In conclusion

In conclusion, the ISA’s publication of the new guidelines is an important developmental stage in how it conducts its administrative procedures.  It allows the alleged violator to plan his response, as well as allow flexibility to both the ISA and the violator to adjust the sanction individually to the violator’s circumstances. At the same time, it seems the ISA has put too much weight on deterrence, skewing the ISA’s model and potentially leading to even more excessive sanctions being imposed in administrative procedures.