Securities Act of 1933 - Rule 902 (b)

No Action, Interpretive and/or Exemptive Letter:
Channel Islands Stock Exchange

September 6, 2002

Response of the Office of International Corporate Finance
Division of Corporation Finance

Ms. Tamara Menteshvili
Chief Executive
Channel Islands Stock Exchange
P.O. Box 623
One Lefebvre Street
St Peter Port, Guernsey GY1 4PJ
Channel Islands

Dear Ms. Menteshvili:

This letter will confirm the response of the Division of Corporation Finance to your request that the Division designate the Channel Islands Stock Exchange as a "designated offshore securities market" within the meaning of Rule 902(b) of Regulation S under the Securities Act of 1933. A copy of your letter is enclosed in order to avoid having to recite or summarize the facts set forth therein. On the basis of the facts presented, we hereby so designate the Channel Islands Stock Exchange.

Pursuant to delegated authority,
 
 
 
Paul M. Dudek
Chief
Office of International Corporate Finance

Incoming Letter:

Mr Alan Beller
Division Director
Division of Corporation Finance
Securities and Exchange Commission
Mail Stop 4-1
450 Fifth Street N.W.
Washington DC 20549
U.S.A.

6 September 2002

Dear Mr Beller

Channel Islands Stock Exchange
Application for Designation as a "Designated Offshore Securities Market"

The Channel Islands Stock Exchange ("CISX"/"Exchange") hereby apply for Designated Offshore Securities Market designation in accordance with SEC Rule 902(b)(2) of Regulation S, under the Securities Act of 1933, as amended.

In applying for this designation, we respectfully submit the detailed information about the CISX, following the criteria set out in the above Rule.

(i) Organisation under Foreign Law

The CISX was established in March 1998 as a company limited by guarantee (LBG), with shares, under the Company (Guernsey) Law, 1994 to 1996. This means the company is a hybrid one, with two classes of members under its Articles of Association - one class of member is a Guarantee Member, the other is a shareholder.¹

For information, incorporation of Guernsey companies requires the services of a local advocate (lawyer) and applications for registration are reviewed by H M Procureur (Her Majesty's Attorney General) in conjunction with Guernsey's financial regulatory authority, the Guernsey Financial Services Commission.

The Exchange's main objects as set out in its Memorandum of Association are:

• to carry on the business of an investment exchange and clearing house; to provide, manage and regulate markets in, and to provide clearing and settlement services with respect to transactions in, investments of all kinds, whether direct or derivative, including financial instruments and currencies; and to provide facilities for the transaction of the businesses of broking, dealing, market-making, stocklending, investment management and advice and other businesses in the field of financial services;
   
• to act as an authority for the admission of investments to be traded or dealt in on any exchange or market and to maintain any official list for the time being required or recognised by the law of any country;
   
• to provide information, depositary and nominee services²;
   
• to provide, maintain and operate, systems for and in connection with the evidencing and transfer of investments without a written instrument and to regulate the use thereof;
   
• to enter into arrangements of any kind and to co-operate and share information with governmental and non-governmental authorities, bodies and persons in any part of the world, and in particular with those having responsibility for the supervision or regulation of financial services; and
   
• to promote high standards in the financial services industry and in particular to make, administer, monitor and enforce rules governing access to and use of any services and facilities provided by the Exchange and the qualification and conduct of persons engaging in the financial services industry or any part thereof, and to make arrangements for the investigation of complaints in respect of business transacted by means of the Exchange's services and facilities.

The CISX is licensed and regulated by Guernsey Financial Services Commission ("Commission"), Guernsey's regulatory authority, to carry out the restricted activity of "operating an investment exchange" under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 ("POI Law"), as amended.

The POI Law is one of the primary pieces of legislation in place governing investment business and encompasses the requirement for persons who, in or within the Bailiwick of Guernsey, carry on a restricted activity - defined in Schedule 2 of the POI Law as promotion, subscription, registration, dealing, management, administration, advising and custody of securities. Also included within Schedule 2 of the POI Law is the restricted activity (which requires a licence to be issued by the Commission) of operating an investment exchange, "that is to say, providing a facility, whether by electronic means or otherwise, for the orderly trading of securities, or for the listing of securities for the purpose of trading, by members of the investment exchange". There are provisions within the POI Law for the making of rules and regulations controlling the conduct of investment business.

Operation of the Exchange

As an independent, commercial company, management and control of the Exchange are vested in the Board of Directors ("the Board") which currently consists of nine directors.

The powers of the Board are set out within the Articles of Association of the Company and in the Rules of the Exchange. In addition to the usual powers of company directors, they provide, inter alia, for the admission of new Members, approvals for listings, the surveillance and supervision of the Exchange and Member discipline. In a number of areas, these powers have been delegated to the Market Authority, which comprises the Chief Executive and senior executive staff of the Exchange.

Under Article 27(5) of the Articles of Association, which sets out the delegation of certain powers from the Board to the Market Authority, the Market Authority shall have, inter alia, the following powers:

• to determine the suitability of applications for admission to the Official List (published daily and containing certain information about securities listed on the CISX);
   
• to apply and enforce the Rules;
   
• to decide on the suspension of trading;
   
• to determine applications for admission as a Guarantee Member³;
   
• to decide on the suspension or cancellation of a Guarantee Member's rights to utilise the Company's services or facilities;
   
• to supervise compliance by the Listing Members with their obligations as sponsors under the Rules;
   
• to decide, where circumstances dictate, the immediacy of the situation, on the full or partial suspension of one or more Guarantee Members. Where such action is necessary, the Directors shall review and ratify the action of the Market Authority within two business days;
   
• to assure the organisation and operation of the Company;
   
• to make proposals to the Directors with respect to changes to the Rules;
   
• to issue Notices to Guarantee Members in the name of and under the authority of the Directors;
   
• to supervise the trading activities on the Company's trading systems and to take all necessary steps to maintain orderly, efficient and transparent trading in accordance with the Rules;
   
• to supervise compliance with the Rules;
   
• to order any person to terminate practices that are contrary to the Rules or the decision of the Market Authority; and
   
• without prejudice to the regulatory supervision to which the Guarantee Members are subject, the Market Authority shall have supervisory and investigative powers over Guarantee Members in order to be able to fulfil its tasks properly in accordance with its status as an investment exchange and to verify the accuracy and genuineness of the information provided to it.

The CISX Listing Rules are the rules which regulate the admission of entities to the Official List and impose ongoing obligations on listed entities. All listing applications must be sponsored by a Listing Member of the Exchange. The CISX operates one market only.

The Exchange offers listing facilities for the following products:

• Investment funds, both open-ended and closed-ended - companies, unit trusts and other legal structures (aka mutual funds or investment trusts);
   
• Debt instruments, including Eurobonds, Warrants and Special Purpose Vehicles;
   
• Primary listings of securities issued by domestic companies (equity shares and other forms of equity such as preference shares, etc) (that is companies that are incorporated in the Channel Islands and do not have an existing listing elsewhere);
   
• Secondary listings of securities issued by domestic companies (equity shares and other forms of equity such as preference shares, etc.) (that is companies that are incorporated in the Channel Islands but are already listed on a recognised overseas exchange); and
   
• Primary and Secondary listings of securities issued by overseas companies (equity shares and other forms of equity such as preference shares, etc.), provided, of course, that those companies are registered in approved jurisdictions and can meet the listing criteria.

Although a number of other instruments could be listed and traded on the Exchange, the Directors decided to limit the initial range of products in order to develop the Exchange in accordance with its business plan. Therefore, the current Listing Rules, which are modelled upon the requirements set out in the London Stock Exchange "Yellow Book" (for equities), the Irish Stock Exchange (for investment funds) and the Luxembourg Stock Exchange (for specialist debt securities) and have been subject to extensive practitioner and regulatory review, cater only for investment funds, debt instruments and equities.

The Listing Rules are available in electronic form through the Exchange's web-site, www.cisx.com, which is used for marketing and promotional purposes by the Exchange and on behalf of its Members and listed entities. Hard copies of the Listing Rules are also available and provided to all Listing Members, together with guidance notes and application checklists.

The admission requirements include that the entity issues a Listing Document (prospectus), or if the CISX agrees, an information memorandum. The prospectus requirements are such that the entity must be duly incorporated in accordance with the company laws in the jurisdiction of establishment.

The minimum requirements for a "public company" (equity securities other than investment funds which have other requirements) include:

• That the issuer and its business are suitable for listing and that there is an adequate and open market in the securities for which listing is sought;
   
• A new applicant for listing must have published audited accounts which cover at least three years and the latest accounts must be in respect of a period ended no more than six months before the date of the listing document. (The CISX may waive the requirement for three years audited accounts - for a lesser period - if it is satisfied that investors have the necessary information available to make an informed judgement concerning the applicant for listing.);
   
• Collectively, the directors must have appropriate expertise and experience for the management of the business;
   
• Shares must be freely transferable and tradeable;
   
• The expected aggregate market value of the securities for which listing is sought must be at least £500,000 (or currency equivalent). The CISX may admit to listing securities of a lower aggregate market value if it is satisfied that there will be an adequate market for the securities;
   
• At least 25% of shares must be in the hands of the public. The CISX may accept a lower percentage if it considers that the market will operate properly with a lower percentage in view of the large number of shares in issue;
   
• An issuer must comply with the continuing obligations of the CISX Listing Rules.

After listing, the entity is subject to the ongoing requirements set out in the Listing Rules. These include continuous and periodic disclosure of pertinent information such as interim and annual reporting. Generally, the requirements are that the issuer, or its designated agent, appraises the CISX of any developments in the listed security. Where applicable, and as soon as practicable following publication of documents such as financial statements and reports, the issuer shall furnish the CISX with such documents. There are certain disclosure requirements regarding any changes to rights, powers or privileges in relation to the listed debt security and any change in the rate of interest. Equality of treatment of shareholders is the underlying principle in relation to the disclosure of information and there is a general duty to inform the CISX of notices and announcements sent out to shareholders.

The predominant securities listed on the CISX are investment funds (both open-ended and closed-ended). The CISX market consists of shares in local trading companies and closed-ended investment funds. As at 31 December 2001, there are three local trading companies (one of which is listed on a primary basis) and seventy-five closed-ended investment funds (mostly secondary listings to the London Stock Exchange) admitted to the CISX Official List.

There were 629 transactions reported during 2001. The Trading Volume statistics are as follows:

The table below sets out the share volumes for the securities traded during 2001.

Operation of the CISX market is covered under sub-paragraph "v" below.

(ii) Association with a generally recognised community of brokers, dealers, banks or other professional intermediaries with an established operating history

The Exchange's membership structure consists of Trading Members and Listing Members. As at 31 August 2002, there are 33 Members of the Exchange, three of which are Trading Members (stock brokerage firms). The three Trading Members are Collins Stewart (CI) Ltd (regulated by the Commission), Dresdner Kleinwort Wasserstein Securities Ltd and Winterflood Securities Ltd (the latter two are regulated by the UK's Financial Services Authority). A full list of Members is provided within Appendix I.

The criteria for membership are as follows:

A Member of the Exchange must be a corporation, partnership or legal entity licensed, regulated or supervised by a regulatory body in a recognised jurisdiction approved by the Exchange or in the case of a Listing Member that is not licensed, regulated or supervised by a regulatory body, be a member of a professional body approved by the Exchange. A list of such recognised jurisdictions, and regulatory and professional bodies is provided within Appendix II.

In addition, applicants for Membership must:

• satisfy the Board that it is of sound financial standing and integrity;
   
• satisfy the Board it is fit and proper to be a Member;
   
• comply with the Rules of the Exchange; and
   
• refrain from carrying on any other business inconsistent with its membership of the Exchange.

An organisation can be either a Trading Member or Listing Member or both.

Trading Members

In addition to compliance with the general qualifications as set out above, an applicant for Membership as a Trading Member (stock brokerage firms) must:

• act with due care and diligence in the best interests of its clients, taking into account the professional knowledge of those clients;
   
• seek from clients all useful information concerning their financial situation, investment experience and financial objectives, in order to provide clients with a service commensurate with their investment knowledge and requirements;
   
• ensure clients are provided with sufficient information, in a timely fashion, commensurate with their investment knowledge so that they can make considered investment decisions;
   
• avoid all possible conflicts of interest, or where they cannot be avoided ensure that it acts in the best interests of its clients, at all times;
   
• on receipt of client orders carry out the transaction as promptly as possible at the best price available at that time, unless otherwise instructed by the client;
   
• have and effectively employ suitably qualified staff for the proper performance of its business; and
   
• have in place the necessary systems and procedures for trading, trade reporting and settlement of transactions.

A Trading Member may register as a Market Maker in listed securities specified by the Trading Member, and in doing so will be required to comply with the Exchange's obligations of a Market Maker.

Listing Members

A Listing Member must be established as an entity in the Channel Islands and must have suitably qualified staff, to ensure proper co-ordination with the Exchange. An issuer wishing to have its securities listed on the Exchange is required to engage the services of a Listing Member who will act as a sponsor. There are two categories of sponsor, as set out below:

Category 1 Members may sponsor all types of securities to listing. Category 1 Members need to satisfy the Exchange of their ability to provide an adequate level of service to issuers by demonstrating that:

• they have a sufficient local presence, as indicated by the number of staff with experience of corporate finance and listing matters, or have access to such staff through satisfactory contractual arrangements; and
   
• executives of the sponsors hold suitable qualifications relating to the securities industry or a suitable allied profession (such as lawyer or accountant or similarly qualified person with relevant experience).

Applicants for Category 1 Members are required to submit career details of key staff and evidence, in the form of a track record of transactions conducted on behalf of clients, which demonstrates that the applicant has sufficient experience in the field of corporate finance business.

Category 2 Members may only sponsor the listing of investment funds. Applicants for Category 2 Member will need to demonstrate to the satisfaction of the Exchange that they have sufficient experience and expertise in the administration and/or listing of investment funds to fulfil their role as sponsor.

There are currently 28 Listing Members, of which one third are law firms providing a full range of corporate services, one Member is an accountancy firm, and the balance of Listing Members are investment fund managers or administrators.

The responsibilities of Listing Sponsors are set out in the Listing Rules but broadly a sponsor is required to:

• confirm to the Exchange that it has satisfied itself as to compliance with the relevant requirements of the Listing Rules;
   
• communicate and deal with the Exchange on all matters arising in connection with the application for listing and the continuing obligations of the issuer;
   
• prepare and lodge with the Exchange a formal application for listing together with all supporting documentation; and
   
• seek the approval of the Exchange for the listing prospectus or other disclosure document.

The number of securities admitted to the Official List totalled 255, as at 31 December 2001, with a market capitalisation of approximately US$15 billion. Two thirds of the securities admitted to the Official List are on a primary basis. A copy of the Exchange's Official List is provided within Appendix III.

(iii) Oversight by a government or self-regulatory body

The CISX is authorised by the Commission, being licensed and supervised under the POI Law and Rules and Regulations made therein. These Rules and Regulations are described within section iv below. The Commission was established as a statutory body by Guernsey's Parliament, known as the "States of Guernsey", under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the Law). The Commission came into being on 1 February 1988.

The Law established the Commission with both general and statutory functions. The general functions include the taking "of such steps as the Commission considers necessary or expedient for the development and effective supervision of the finance business in the Bailiwick of Guernsey" and the statutory functions include a number of laws such as The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended; The Protection of Depositors, Companies and Prevention of Fraud (Bailiwick of Guernsey) Law, 1969, as amended; The Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended; and the Insurance Business (Guernsey) Law, 1986 as amended. In carrying out its general functions, the Commission is required by the Law to have particular regard to (a) the protection of the public against financial loss due to dishonesty, incompetence or malpractice by persons carrying on finance business; and (b) the protection and enhancement of the reputation of the Bailiwick of Guernsey as a finance centre.

The Commission maintains a relationship with or is a member of a number of international regulatory and supervisory bodies. These are set out below by sector:

Investment Business

• International Organisation of Securities Commissions (IOSCO)
• Enlarged Contact Group on the Supervision of Collective Investment Funds

Banking

• The Basel Committee on Banking Supervision
• The Offshore Group of Banking Supervisors

Insurance

• The International Association of Insurance Fraud Agencies
• The International Association of Insurance Supervisorsd
• The Offshore Group of Insurance Supervisors

In May 2000, the G-7 Financial Stability Forum (established by the G-7 Ministers) judged Guernsey to be a Group 1 jurisdiction (the top group of offshore financial centres), considering Guernsey to have an appropriate legal infra-structure, supervisory practices and a level of resources devoted to supervision and co-operation relative to the size of its financial activities.

In June 2000, the Financial Action Task Force, on behalf of the Offshore Group of Banking Supervisors, completed its review of Guernsey's anti-money laundering system and concluded that Guernsey is co-operative and has a comprehensive anti-money laundering system.

Guernsey is within an OECD jurisdiction (United Kingdom) and OECD conventions apply.

Guernsey was recognised as a 'Qualified Intermediary' jurisdiction by the US Internal Revenue Service in September 2000.

Guernsey is a 'Designated Territory' under Section 270 of the UK Financial Services Markets Act, 2000 (formerly Section 87 of the UK Financial Services Act, 1986).⁴

(iv) Oversight standards set by an existing body of law

Under the Regulations and Rules made under the POI Law, the CISX is subject to The Investment Exchange (Notification) Rules ("IEN Rules"), 1998, a copy of which is provided within Appendix IV, and The Licensees (Financial Resources, Notification, Conduct of Business and Compliance Rules, 1998 ("FNCC Rules"). A summary of applicable Rules is also provided within Appendix IV.

These Regulations and Rules are statutory requirements applied and enforced by the Commission. Under these Regulations and Rules, the Commission carries out supervisory inspection visits to the Exchange and the Exchange must comply with a number of requirements such as the filing of quarterly, half-yearly and yearly returns, including its business and regulatory plan, financial statements and compliance reports. The Commission has the right of access and inspections and the CISX "must co-operate to the fullest possible degree with any inspection carried out by the Commission in respect of the conduct of its controlled investment business".

The prudential rules, under the IEN Rules include the provision of:

• Financial, human and technical resources;
• Safeguards for investors;
• Administrative, accounting and internal controls; and
• Promotion and maintenance of high standards of business practice.

There is a duty of notification by the Exchange to the Commission with regard to securities listed or dealt on the Exchange, including notification of any proposed changes in the type of investments listed or dealt on the Exchange and where the Exchange discontinues or suspends the listing of any type of investments listed or dealt on the Exchange. In addition the Exchange must notify the Commission of the trading hours of the Exchange, any trading halt or any suspension of trading of any security.

The FNCC, the conduct of business rules, apply to all licensees under the POI Law and, briefly, requires the CISX to establish and maintain:

• adequate financial resources;
• accounting records and an audit trail;
• compliance arrangements;
• systems and procedures to ensure proper performance of its business activities; and
• conformity with the Principles, including observance of high standards of integrity and fair dealing in the conduct of business.

The Commission, in carrying out its oversight responsibilities, requires the CISX to comply with the IOSCO Principles (25 to 30) in respect of the standards for the operation of the secondary market.

(v) Reporting of securities transactions on a regular basis to a governmental or self-regulatory body

The CISX is a screen-based market, with no trading floor. The trading hours of the CISX are from 8.00am until 4.30pm, Monday to Friday. All Trading Members must have access to Reuters (the Exchange's trading platform) as part of their Membership requirement. All securities transactions must be reported to the Market Authority of the Exchange by Trading Members within three minutes of the trade. For trade reporting, the CISX requires the following information: counter-party ID, security, price, date, time and size.

The price of all deals reported is distributed immediately by the CISX via Reuters. Information published pursuant to a trade report includes size and time of sale, together with the price. The Market Authority sets and publishes the normal market size for each security within the CISX pages on Reuters. The Commission, as well as any user of Reuters has access to the CISX pages on Reuters (CISXINDEX) for prices and other market data.

The Market Authority has the power under the IEN Rules (discussed under section iv) to suspend trading in any security.

The Rules governing Trading also provide for, inter alia:

• the establishment of normal trading hours (set at 08.00 to 16.30);
   
• the entry of quotations and orders;
   
• contingency in the event that a Market Maker is unable to enter or update its quotations;
   
• the registration and de-registration of Market Makers;
   
• transaction reporting and trade publication; and
   
• provision for price stabilisation, short selling, and stock borrowing and lending.

Market Maker obligations are set out in Chapter V of the Membership Rules of the Exchange (headed "Trading") and include the requirements to enter and maintain at all times two-sided quotations on the trading system; and actively offer to buy from and sell to an enquiring Trading Member at the price and in a size up to that displayed by it.

Trading volume has averaged 45 million shares per annum, with an average share value of £58 million.

(vi) A system for exchange of price quotations through common communications media

The Exchange's screen-based trading platform is based on Reuters' Triarch network installed at the Exchange's St. Peter Port, Guernsey offices. The Exchange's pages on Reuters are accessed by simply entering CISXINDEX and following the menu choices.

The key features of the trading system are as follows:

• an electronic bulletin board on which Market Makers may input two-way prices and brokers may enter orders in real time;
   
• all trading is done by telephone (consideration will be given to automated order matching in the longer term);
   
• trades are reported to the Exchange using the electronic bulletin board and published within three minutes of execution;
   
• information on all quotes, orders and trades is stored at the Exchange, both to facilitate market surveillance and to provide a historical record; and
   
• news concerning companies listed on the Exchange is disseminated via Reuters on a continuous basis.

(vii) An organised clearance and settlement system

The Rules relating to the settlement of transactions are set out in Chapter VI of the Membership Rules of the Exchange and deal with, inter alia:

• trade confirmation between Members and the form, content and issue of a contract note when trading with non-Members;
   
• the method and timing of settlement (which in the case of local and UK equities will be identical to the UK);
   
• responsibility for settlement;
   
• partial and late settlement;
   
• buying-in; and
   
• the appointment of settlement agents.

Trading in the shares of local companies are settled via Crest or Crest Residual. International debt issues, and other eligible issues, are settled through either Cedel Bank or EuroClear unless otherwise agreed, by the parties to the transaction, at the time of trade. Under the Rules of the Exchange, the Market Authority shall determine the standard settlement period for each security, which in general follows market practice for the type of security concerned. (Current market practice (following London) is for the settlement of domestic and foreign equities on a T+3 basis.)

Additional information

In terms of its international profile, the CISX is:

• Registered with the International Federation of Stock Exchanges (FIBV) as a 'corresponding market' and has applied for Affiliate Securities Market status;
   
• An Associate Member of the International Securities Market Association (ISMA);
   
• A Member of the European Securitisation Forum. This organisation is sponsored by the US Bond Market Association;
   
• In July 2000 the CISX was officially recognised by the Australian Stock Exchange; and
   
• The CISX has applied to the UK Inland Revenue for recognition as a Foreign Stock Exchange under section 841 ICTA, 1988.

Based upon the above considerations, we formally request the Director designate the CISX as a Designated Offshore Securities Market, within the meaning of SEC Rule 902(b)(2).

For any questions concerning this application, please contact the undersigned as follows:

Ms Tamara Menteshvili
Chief Executive
The Channel Islands Stock Exchange
P O Box 623
One Lefebvre Street
St Peter Port
Guernsey GY1 4PJ
Tel: (+44) 01481 713831
Fax: (+44) 01481 714856
Email: info@cisx.com
Internet: www.cisx.com

Yours sincerely

Tamara Menteshvili
Chief Executive
The Channel Islands Stock Exchange

APPENDICES

http://www.sec.gov/divisions/corpfin/cf-noaction/chaniss090602.htm