Royal Decree 1559/2012 establishing the legal regime for asset management companies

OFFICIAL STATE GAZETTE No. 276 Friday, November 16, 2012 Sec. I. Page 79904 I. GENERAL PROVISIONS MINISTRY OF ECONOMY AND COMPETITIVENESS 14118 Royal Decree 1559/2012, of November 15, establishing the legal regime for asset management companies.

Law 9/2012, of November 14, on the restructuring and resolution of credit institutions, has implemented in Spain the general regulatory framework for the management of banking crises, with the aim that public authorities have the most appropriate instruments to carry out the restructuring and, where appropriate, the orderly resolution of credit institutions facing difficulties.

Within the intervention scheme designed, the law has implemented a broad set of restructuring and resolution instruments, understood as those measures that the Orderly Banking Restructuring Fund, hereinafter FROB, may adopt to restore the weak situation of a credit institution.

One of the most prominent restructuring and resolution instruments provided for by the law, and which constitutes an important novelty in our legal system, is the one regarding the use of so-called asset management companies. Their purpose is to allow the concentration in a single company of those assets considered problematic or that could damage the balance sheets of entities, thereby facilitating their management and ensuring that, from their transfer, an effective transfer of risks linked to these assets occurs.

The regulation of these companies is addressed from two perspectives in Law 9/2012, of November 14. On the one hand, Chapter VI includes the generic regulation of the asset management company, where the rules regarding the legal regime applicable to the company, the method for determining the criteria to define the categories of assets to be transferred, and the regime for their transfer are integrated.

This regulation will apply, with the pertinent intention of permanence, to all those present or future cases where the restructuring or resolution of a credit institution may require the establishment of an asset management company. Therefore, although it obviously applies to the asset management company created at this moment to address the current financial crisis, its force is not limited to the moment we are currently in but transcends it, constituting the reference legal framework that will apply to each and every situation where it is necessary to resort to the creation of this type of company.

On the other hand, the additional provisions seventh to tenth of the aforementioned law contain a specific regulation, ordering the establishment of the asset management company to which the assets resulting from the banking restructuring process currently being carried out in our country will be transferred. This regulation therefore has a more circumstantial nature, framed within the process of restructuring credit institutions currently underway.

The aforementioned provisions establish the legal framework applicable to the creation of the Asset Management Company for Assets from Banking Restructuring, hereinafter SAREB, and to the assets that will be transferred to it; they prescribe which entities will be obliged to transfer their assets to the company, and enable the establishment of groupings of SAREB's assets and liabilities that will form separate estates lacking legal personality.

In short, this royal decree undertakes the mandatory development of the provisions of Law 9/2012, of November 14, regarding asset management companies. This regulatory development will be carried out from both a general perspective, that is, introducing regulation relative to the generic framework applicable to all asset management companies that may be established, and from a specific perspective, that is, completing the legal regime applicable to the so-called SAREB. cve: BOE-A-2012-14118

OFFICIAL STATE GAZETTE No. 276 Friday, November 16, 2012 Sec. I. Page 79905 Moving on to analyze the content of the norm, the royal decree approved is divided into four chapters. Chapter I contains a series of general provisions, relating to the definitions of the concepts to be used throughout the text and to the general objectives that asset management companies must pursue in the development of their activity. In short, these asset management companies, as instruments of restructuring and resolution, are oriented to facilitate the adequate development of these processes in which they are applied. For these purposes, it will be of particular importance that, when transferring assets to asset management companies, an effective transfer of the risks linked to these assets occurs and the use of public resources is minimized.

Chapter II refers to the assets transferable to an asset management company. A series of general qualitative and quantitative criteria are defined, as well as specific ones for credit rights and real estate, which will be used by the FROB to define the categories of assets that will be the subject of transfer. On the other hand, the Bank of Spain may, by circular, expand these criteria, and will resolve doubts regarding the inclusion of an asset within the categories defined by the FROB.

Once the valuation adjustments have been made and the transfer value determined by the Bank of Spain, the FROB will order the definitive transfer of the assets.

Chapter III contains the rules regarding valuation adjustments and the transfer value of the assets that determines the final phase of fixing the transfer price. These valuation criteria take into account whether the assets are traded on an active market or not, and specifically differentiate between the valuation of real estate, credit rights, and instruments representing share capital.

The final determination of the transfer value will be made by the Bank of Spain, starting from valuation reports commissioned from one or more independent experts, and adjusting the estimate in accordance with the criteria provided for in this royal decree. The transfer value will be expressed for each category of asset as a percentage of the book value of the assets after making the necessary adjustments.

Chapter IV introduces the specific regime applicable to SAREB and its separate estates, the Bank Asset Funds, hereinafter FAB, to which it may transfer its assets.

SAREB is constituted as a public limited company that presents certain particularities derived from its singular corporate object and the public interest derived from its activity. Its object is determined by the transfer of assets necessary to develop the restructuring and rehabilitation process of the Spanish banking sector, to be undertaken within the framework of the memorandum of understanding signed between the Spanish and European authorities on July 23, 2012, for financial assistance.

The main features of its legal regime are indicated below. First, only financial entities related in this royal decree or others that the Minister of Economy and Competitiveness may expressly authorize can be shareholders of SAREB. In addition, SAREB must comply with several specific corporate governance requirements that refer, for example, to the obligation to have a certain number of independent directors on the board of directors and to the requirement to establish several committees: audit, remuneration and appointments, management, risk, investment, and assets and liabilities. In addition, members of the Board of Directors must meet specific requirements of professionalism, honorability, and experience. In short, SAREB must act at all times with transparency and professionalism. In particular, it must prepare a semi-annual report on its activity and will be responsible for presenting annually the Independent Compliance Report, with the aim of collecting an external and independent analysis on the adequacy of its activities and strategies to the mandates legally attributed to it. These reports do not alter, in any case, the supervisory and inspecting responsibility attributed, in accordance with Law 9/2012, of November 14, to the Bank of Spain.

As already anticipated, Law 9/2012, of November 14, allows SAREB to transfer its assets to special funds, in order to facilitate the divestment process, adapting it to the specialties of the assets managed by this company. For these purposes, the FABs are created with the purpose, singular and exclusive, of serving as tools for divestment in SAREB. Their regulation, inspired by that of securitization funds and collective investment institutions, aims to give full guarantees to FAB investors, without undermining the necessary flexibility required for funds created with a very singular asset structure, and whose commercialization is directed exclusively to professional investors. Therefore, it has been necessary to delimit aspects such as admissible assets and liabilities and the requirements for their transfer, the rules for constitution, merger, and spin-off, the possibility of creating compartments, the possibility of creating a syndicate of holders of securities issued by the FAB, or the transparency and accounting rules. The National Securities Market Commission will create a register for the FABs and supervise the compliance by management companies with the organizational and operational requirements imposed on them by the regulations, as well as with the transparency rules imposed on the FABs.

Finally, this chapter develops another of the authorizations already provided for in Law 9/2012, of November 14. In this case, making use of what is provided for in the eighth additional provision of the same, it will not be the FROB as corresponds according to what is provided for in the general regime, but the royal decree itself, that will design the categories of assets to be transferred to SAREB.

In virtue thereof, upon proposal of the Minister of Economy and Competitiveness, in agreement with the Council of State and after deliberation of the Council of Ministers in its meeting of November 15, 2012, I HEREBY ORDER: CHAPTER I General Provisions Article 1. Object. This royal decree aims to develop the regime of organization and functioning of asset management companies, as well as the powers of the Orderly Banking Restructuring Fund, hereinafter FROB, and the Bank of Spain in relation to them, in accordance with what is provided in Chapter VI of Law 9/2012, of November 14, on the restructuring and resolution of credit institutions. It also aims to develop what is provided in the additional provisions seventh to tenth of the aforementioned law in relation to the Asset Management Company for Assets from Banking Restructuring and its separate estates. Article 2. Definitions. For the purposes of this royal decree, the following are understood: a) Asset management companies, those constituted by virtue of what is provided in Article 35 of Law 9/2012, of November 14, on the restructuring and resolution of credit institutions, with the purpose of managing certain categories of especially damaged assets or whose presence in the balance sheet of an entity is considered detrimental to its viability. Therefore, this consideration will not apply to the asset management companies referred to in Chapter II of Law 8/2012, of October 30, on the rehabilitation and sale of real estate assets of the financial sector. b) Managers of Bank Asset Funds, those management companies of asset securitization funds entrusted with the constitution, administration, and representation of the Bank Asset Funds (FAB) in accordance with the regime provided for in Section 2 of Chapter IV. cve: BOE-A-2012-14118

OFFICIAL STATE GAZETTE No. 276 Friday, November 16, 2012 Sec. I. Page 79907 c) Adjudicated or acquired assets in payment of debts, those assets that the credit institution or any entity over which it exercises control within the meaning of Article 42 of the Commercial Code receives from its debtors or third parties in substitution, real subrogation, or compensation, total or partial, of financial assets that represent rights to claim against its debtors, regardless of the manner in which ownership is acquired. d) Observable data, those obtained directly from the market, such as the interest rate for a certain term or other public information available regarding prices practiced in transactions on equivalent assets. These data must be obtained from the best information available that participants in the market for the traded asset have used to fix the price of the asset. e) Unobservable data, those that are not available in the market, but that have been estimated using the best available information on the assumptions that participants in the market would use to fix the price of an asset, such as the effect of the credit risk of a debt instrument. f) Valuation date, that which coincides with the date of the agreement to transfer the assets to the asset management company. However, for the transfer of movable or immovable property, the valuation date may be up to three months prior to the date of the transfer agreement, provided that the valuation parameters are not subject to significant changes between one date and the other. g) Active market, that considered as such in accordance with the accounting regulations applicable to credit institutions. h) Real estate sector company, that whose main object is urban development, real estate promotion, construction of buildings, sale and purchase of real estate on its own account, leasing of real estate on its own account, real estate activities on behalf of third parties, management of assets related to any of the aforementioned activities, or mere holding of rights over real estate. i) Market value, the amount of cash, or cash equivalent, that would be obtained by the sale of an asset in an orderly transaction between market participants for the asset in question who, acting in a regime of mutual independence, are basically informed about the nature and current characteristics of the traded asset. j) Economic value, is an estimate of the present value of an asset that the entity would obtain from a non-forced sale, maximizing the use of relevant observable market data and minimizing unobservable data. Article 3. Objectives of asset management companies.

1. Asset management companies must contribute to the adequate development of the restructuring or resolution processes of credit institutions in whose course they are constituted, facilitating the fulfillment of the objectives provided for in Article 3 of Law 9/2012, of November 14.
2. In the development of their activity, asset management companies must pursue the following objectives: a) Contribute to the rehabilitation of the financial system by acquiring the corresponding assets so that, from their transfer, an effective transfer of the risks linked to these assets occurs. b) Minimize public financial support. c) Satisfy the debts and obligations incurred in the course of their operations. d) Minimize possible distortions in the markets that may derive from their activity. e) Dispose of the received assets optimizing their value, within the time frame for which they have been constituted. cve: BOE-A-2012-14118

CHAPTER II Assets transferable to an asset management company Article 4. Transfer of assets to an asset management company. In accordance with what is provided in Article 35 of Law 9/2012, of November 14, the FROB may oblige a credit institution to transfer to an asset management company certain categories of assets, defined in accordance with what is provided in the following articles, that appear in the entity's balance sheet, or to adopt the necessary measures for the transfer of assets that appear in the balance sheet of any entity over which the credit institution exercises control within the meaning of Article 42 of the Commercial Code, when they are especially damaged assets or whose presence in said balance sheets is considered detrimental to their viability, in order to write off such assets from the balance sheet and to allow independent management of their realization. Article 5. Criteria for the definition of asset categories.

1. The FROB will define the categories of assets that must be the subject of transfer, in accordance with the following criteria and specifications: a) General qualitative criteria:
2. Nature of the asset. A distinction will be made between real estate, movable property, credit rights, instruments representing share capital of other entities, or intangible assets.
3. Legal business that determined its acquisition. A distinction will be made between sale and purchase, exchange, adjudication in or for payment of debts, compensation, corporate contribution, or acquisition on a gratuitous basis.
4. Activity with which the asset is related. Specifically, in the case of credit rights, attention will be paid to the activity financed by the asset and in the case of movable property, real estate, and intangible assets, to the activity that had originated its acquisition by the credit institution. In the case of instruments representing share capital of other entities, attention will be paid to the main activity of the issuing society of those titles. In all these cases, a distinction will be made between construction and real estate promotion activities, industrial activities, commercial activities, credit to financial institutions, credit to public administrations, credit to small and medium-sized enterprises and individual entrepreneurs, credit for the acquisition of housing, consumer credit, and other activities. b) Qualitative criteria specifically applicable to credit rights:
5. Existing guarantees. A distinction will be made between rights with first-rank real guarantee, differentiating between real estate guarantees, movable guarantees, and other guarantees, rights with other real guarantees, rights with personal guarantee, and unsecured rights.
6. Classification. A distinction will be made between credits classified as normal, substandard, doubtful due to customer delinquency, doubtful for reasons other than customer delinquency, or as regularized suspended assets, in accordance with the circulars issued by the Bank of Spain on accounting matters for credit institutions.
7. Geographic location of the real estate guarantee. For credit rights with real estate guarantee, a distinction will be made by countries where the assets on which the guarantee is constituted are located. In the case of Spain, a distinction will be made by provinces and autonomous cities. cve: BOE-A-2012-14118

OFFICIAL STATE GAZETTE No. 276 Friday, November 16, 2012 Sec. I. Page 79909 c) Qualitative criteria specifically applicable to real estate:

1. Destination. A distinction will be made between residential buildings, commercial or industrial use, land for development, and rural estates.
2. State. A distinction will be made between completed with occupancy license, completed without occupancy license, work in progress, developed, and undeveloped.
3. Classification. A distinction will be made between own use, inventory, real estate investments, non-current assets for sale, and assets leased under financial leases.
4. Geographic location: A distinction will be made by countries where the asset is located and, in the case of Spain, by provinces and autonomous cities or by other geographic parameters. d) General quantitative criteria:
5. Age in balance sheet. A minimum threshold and several age tranches may be determined.
6. Value. Minimum transfer thresholds may be determined and assets may be distinguished in tranches, based on their net book value. e) Specific quantitative criteria for credit rights: Value of the guarantee. Several tranches may be established as a percentage of the net book value of the guaranteed credit right.
7. The definition of each category of assets will be carried out as follows: a) All general qualitative criteria will be used. Within each criterion, each specification will give rise to a distinct category of asset. b) In the case of credit rights or real estate, the specific qualitative and quantitative criteria applicable to them must also be used, generating also each criterion specification a distinct category of asset. c) General quantitative criteria may also be applied to all or part of the categories defined by applying qualitative criteria, generating new categories. If tranches are used, as many categories will be generated as tranches are used.
8. The Bank of Spain may, by circular, expand the criteria and specifications determined in this article, and define them with more precision. Article 6. Concrete determination of the categories of assets to be transferred.
9. The acts that the FROB issues in application of what is provided in Article 35.1 of Law 9/2012, of November 14, must determine the categories of assets to be transferred and number each of them sequentially, this numbering may vary from entity to entity. In cases where the assets to be transferred are instruments representing share capital of other entities that attribute to the credit institution or to any other entity over which it exercises control within the meaning of Article 42 of the Commercial Code the control of the participatory societies, the FROB may require the credit institution to, prior to the transfer of these assets, proceed to a simplification of the structure of the participatory society or its assets and liabilities.
10. The FROB will determine the categories of assets to be transferred in a single list, exceptionally and when an unforeseen change in circumstances justifies it, including new categories of mandatory transfer assets to the extent that they are especially damaged or their presence is considered prejudicial