Circular 2/2018 of the National Securities Market Commission modifying Circular 5/2013 and Circular 4/2013 on Corporate Governance and Remuneration Reporting Models

OFFICIAL STATE GAZETTE No. 171 Monday, July 16, 2018 Sec. I. Page 71162 I. GENERAL PROVISIONS NATIONAL SECURITIES MARKET COMMISSION 9935 Circular 2/2018, of June 12, of the National Securities Market Commission, modifying Circular 5/2013, of June 12, which establishes the models for the annual corporate governance report of listed joint-stock companies, savings banks, and other entities issuing securities admitted to trading on official securities markets, and Circular 4/2013, of June 12, which establishes the models for the annual remuneration report of directors of listed joint-stock companies and members of the board of directors and control committee of savings banks issuing securities admitted to trading on official securities markets.

Circular 7/2015, of December 22, of the National Securities Market Commission, modifying Circular 5/2013, of June 12, which establishes the models for the annual corporate governance report of listed joint-stock companies, savings banks, and other entities issuing securities admitted to trading on official securities markets, and Circular 4/2013, of June 12, which establishes the models for the annual remuneration report of directors of listed joint-stock companies and members of the board of directors and control committee of savings banks issuing securities admitted to trading on official securities markets, represented an update of the annual corporate governance report and annual remuneration report models to the content established by Law 31/2014, of December 3, modifying the Consolidated Text of the Capital Companies Law for the improvement of corporate governance, and incorporated the new recommendations of the Code of Good Governance of Listed Companies, approved by the Board of the National Securities Market Commission (CNMV) in February 2015.

Until now, obligated entities had been submitting their corporate governance and directors' remuneration reports using the standardized models established for this purpose. In addition to the obvious benefits of this system, a number of drawbacks had also been detected. Among them, a certain lack of flexibility for companies, limiting their ability to organize and structure information in the way they consider best explains the history and evolution of the entity, and implying that some companies prepare, in addition to the standardized model to comply with legal obligations, another model with a format more adapted to their own context and circumstances and to the corporate image of the company to distribute among shareholders, institutional investors, proxy advisors, and other stakeholder groups.

Therefore, for issuing companies, it is considered convenient to eliminate the mandatory nature of the formats contained in the standardized electronic documents of the corporate governance and directors' remuneration reports established in Circulars 4/2013 and 5/2013 of the CNMV. In this sense, the possibility is enabled for those entities that do not wish to use the standardized electronic document to present the reports in a free format, the content of which must respect the minimum content established by regulations, including this Circular, and which must necessarily be accompanied by statistical appendices with the aim of continuing to have a minimum of information in standardized format to facilitate its compilation and subsequent processing by this CNMV, so that supervisory functions can continue to be exercised efficiently.

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OFFICIAL STATE GAZETTE No. 171 Monday, July 16, 2018 Sec. I. Page 71163 On the other hand, Royal Decree-Law 18/2017, of November 24, which modifies the Commercial Code, the Consolidated Text of the Capital Companies Law approved by Royal Legislative Decree 1/2010, of July 2, and Law 22/2015, of July 20, on Audit of Accounts, in matters of non-financial information and diversity, expands the scope of information to be provided in the annual corporate governance report regarding the diversity policies applied by the company, referring to gender diversity and, for entities that are not small and medium-sized according to the definition included in the audit of accounts legislation, also age, disability, education, and professional experience of directors.

In the same sense, the experience of recent years has demonstrated that some technical adjustments are necessary, both in the annual corporate governance report and in the annual remuneration report of directors, in order to eliminate some sections that have lost relevance in the current context, and to introduce or develop other sections that are relevant to adequately understand the corporate governance system of securities issuing entities and the remuneration of directors of listed joint-stock companies.

Finally, it has been considered appropriate to include a new model of annual corporate governance report applicable to entities that are part of the institutional public sector and are issuers of securities other than shares, which is more simplified and adapted to the particularities of these entities.

The second final provision of Order ECC/461/2013, of March 20, which determines the content and structure of the annual corporate governance report, the annual remuneration report, and other information instruments of listed joint-stock companies, savings banks, and other entities issuing securities admitted to trading on official securities markets, empowers the CNMV to detail the content and structure of corporate governance and directors' remuneration reports, for which purpose it may establish models according to which entities must make the aforementioned reports public.

By virtue thereof, the Board of the National Securities Market Commission, in its meeting of June 12, 2018, in exercise of the powers conferred, prior to the report of its Advisory Committee, has ordered:

First Rule. Modification of Circular 4/2013, of June 12, of the National Securities Market Commission, which establishes the models for the annual remuneration report of directors of listed joint-stock companies and members of the board of directors and control committee of savings banks issuing securities admitted to trading on official securities markets.

Circular 4/2013, of June 12, of the National Securities Market Commission is modified as follows:

One. The model of the annual remuneration report of directors of listed joint-stock companies included in Annex I of Circular 4/2013, of June 12, is replaced by that contained in Annex I of Appendix I of this Circular, which must be completed in accordance with the instructions contained therein.

Two. Rule Four is drafted as follows:

"Rule Four. Method of submission of the annual remuneration report to the CNMV.

1. For dissemination as a relevant fact, the reports provided for in the first and second rules of this Circular shall be submitted to the CNMV Electronic Registry, in accordance with the provisions of the Resolution of the President of the National Securities Market Commission of November 16, 2011, creating and regulating the CNMV Electronic Registry, as a standardized electronic document through the procedure enabled for this purpose in the CIFRADOC/CNMV service.
2. The obligation of submission shall be understood as fulfilled when the entity receives a message of correct incorporation of the corresponding report and, where applicable, the corresponding statistical annex via telematic means from the CNMV.
3. Listed entities that so wish may present the annual remuneration report of directors in free PDF format, without using the standardized electronic document, provided that the content of the model defined in the First Rule is respected; in this case, the report in free format, accompanied by the statistical annex Annex III, shall be disseminated as a relevant fact and presented at the general meeting of shareholders to be submitted to advisory vote.
4. Those listed entities that opt to present the report in free format must necessarily accompany and publish the annual report with a statistical appendix that shall conform in format, content, and structure to the model defined in Annex III Statistics of this Circular and which shall be presented as a standardized electronic document through the procedure enabled for this purpose in the CIFRADOC/CNMV service. The instructions for the annual remuneration report model shall also be valid for the completion of the statistical annex. Both the annual remuneration report in free format and the statistical annex must be submitted simultaneously.
5. Savings banks issuing securities admitted to trading on official securities markets that so wish may also present the annual remuneration report in free PDF format, provided that the content of the model defined in the Second Rule is respected. Savings banks that opt to submit the report in free format shall not submit a statistical annex.
6. Notwithstanding the provisions of the preceding paragraphs and at the request of the entity, the CNMV may exceptionally and for justified causes authorize that the reports provided for in the first and second rules, together with the corresponding statistical annex Annex III where applicable, be submitted by another means in the appropriate model, without this exempting the obligated entity from the subsequent submission of the report and, where applicable, statistical annex through the procedure enabled for this purpose in the CIFRADOC/CNMV service."

Second Rule. Modification of Circular 5/2013, of June 12, of the National Securities Market Commission, which establishes the models for the annual corporate governance report of listed joint-stock companies, savings banks, and other entities issuing securities admitted to trading on official securities markets.

Circular 5/2013, of June 12, of the National Securities Market Commission is modified as follows:

One. The model of the annual corporate governance report of listed joint-stock companies included in Annex I of Circular 5/2013, of June 12, is replaced by that contained in Annex I of Appendix II of this Circular.

Two. Section 2 of the First Rule is drafted as follows:

"2. Without prejudice to the foregoing, companies that do not comply with the recommendations of the Code of Good Governance of Listed Companies indicated below are not obliged to complete the corresponding sections of Annex I: With regard to recommendation 14, section C.1.7. With regard to recommendation 19, section C.1.8. With regard to recommendation 22, sections C.1.37 and C.1.38. With regard to recommendation 27, section C.1.26. With regard to recommendation 36, section C.1.17, second paragraph, and C.1.18. With regard to recommendation 42.2.c), section C.1.31. In any case, in chapter 'G' of the annual corporate governance report, the appropriate explanations shall be included when the company does not follow, or follows partially, the recommendations of the Unified Code of Good Governance of Listed Companies."

Three. The model of the annual corporate governance report of other issuing entities included in Annex II of Circular 5/2013, of June 12, is replaced by that contained in Annex II of Appendix II of this Circular.

Four. A new Fourth Rule is introduced, which is drafted as follows:

"Rule Four. Model of annual corporate governance report of entities that are part of the institutional public sector issuing securities traded on official securities markets. The annual corporate governance report of entities that are part of the institutional public sector issuing securities traded on official securities markets, regulated in Article 7 of Order ECC/461/2013, of March 20, which determines the content and structure of the annual corporate governance report, the annual remuneration report, and other information instruments of listed joint-stock companies, savings banks, and other entities issuing securities admitted to trading on official securities markets, shall conform in format, content, and structure to the model defined in Annex IV of Appendix II of this Circular."

Five. Rule Four is renumbered as Rule Five and is drafted as follows:

"Rule Five. Completion instructions. When preparing the annual corporate governance reports, entities shall take into account the completion instructions accompanying each of the respective models applicable to them, defined in Annexes I, II, III, and IV in this Circular. These same instructions shall also be taken into account in the completion of the statistical annexes mentioned in Rule Six."

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OFFICIAL STATE GAZETTE No. 171 Monday, July 16, 2018 Sec. I. Page 71166 Six. Rule Five is renumbered as Rule Six and is drafted as follows:

"Rule Six. Method of submission of the annual corporate governance report.

1. For dissemination as a relevant fact and for the purposes of information processing for statistical purposes, as well as the publication of information provided for in section 5 of Article 540 of the Consolidated Text of the Capital Companies Law, approved by Royal Legislative Decree 1/2010, of July 2, the reports provided for in the first, second, third, and fourth rules of this Circular shall be submitted to the CNMV Electronic Registry, in accordance with the provisions of the Resolution of the President of the National Securities Market Commission of November 16, 2011, creating and regulating the CNMV Electronic Registry, as a standardized electronic document, where applicable, or in PDF format by entities that opt to present the reports in free format, accompanied where applicable by the corresponding statistical annex, through the procedure enabled for this purpose in the CIFRADOC/CNMV service.
2. The obligation of submission shall be understood as fulfilled when the entity receives a message of correct incorporation of the corresponding report and, where applicable, the corresponding statistical annex via telematic means from the CNMV.
3. Entities subject to the scope of the models established in Rules One and Two, that so wish, may present the annual corporate governance report in free PDF format, without using the standardized electronic document, provided that the content of the model defined in the aforementioned Rules is respected, as applicable; this being the report, accompanied where applicable by the corresponding statistical annex, that shall be disseminated as a Relevant Fact and shall form part of the Management Report.
4. The entities referred to in the preceding paragraph that use a free format must necessarily accompany and publish the annual report with a statistical annex, which shall conform, in any case, in format, content, and structure, to the model defined in Annex V or VI, as applicable, of this Circular and which shall be presented as a standardized electronic document through the procedure enabled for this purpose in the CIFRADOC/CNMV service. Both the annual corporate governance report in free format and the corresponding statistical annex must be submitted simultaneously.
5. Savings banks issuing securities admitted to trading on official securities markets that so wish may also present the annual corporate governance report in free PDF format, provided that the content of the model defined in the Third Rule is respected. Savings banks that opt to submit the annual report in free format shall not submit a statistical annex.
6. Entities that are part of the institutional public sector shall submit their annual corporate governance report in PDF format respecting the content and format established in the model referred to in the Fourth Rule.
7. Notwithstanding the provisions of the preceding paragraphs and at the request of the entity, the CNMV may exceptionally and for justified causes authorize that the reports provided for in the first, second, third, and fourth rules of this Circular be submitted by another means in the appropriate model, without this exempting the obligated entity from the subsequent submission of the report and, where applicable, the statistical annex, through the procedure enabled for this purpose in the CIFRADOC/CNMV service."

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OFFICIAL STATE GAZETTE No. 171 Monday, July 16, 2018 Sec. I. Page 71167 Sole Final Provision. Entry into force. This Circular shall enter into force on the day following its publication in the "Official State Gazette" and shall apply to annual corporate governance reports and directors' remuneration reports that obligated entities must present corresponding to financial years closed from December 31, 2018, inclusive. Madrid, June 12, 2018. - The President of the National Securities Market Commission, Sebastián Albella Amigo.

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OFFICIAL STATE GAZETTE No. 171 Monday, July 16, 2018 Sec. I. Page 71168 APPENDIX I Model and statistics of the Annual Remuneration Report of Directors of Circular 4/2013, of the CNMV ANNEX MODEL I ANNUAL REMUNERATION REPORT OF DIRECTORS OF LISTED JOINT-STOCK COMPANIES ISSUER IDENTIFICATION DATA END DATE OF REFERENCE FISCAL YEAR TAX ID NUMBER Company Name: Registered Office:

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OFFICIAL STATE GAZETTE No. 171 Monday, July 16, 2018 Sec. I. Page 71169 ANNUAL REMUNERATION REPORT OF DIRECTORS OF LISTED JOINT-STOCK COMPANIES A. COMPANY REMUNERATION POLICY FOR THE CURRENT FISCAL YEAR A.1 Explain the current remuneration policy for directors applicable to the current fiscal year. To the extent relevant, specific information may be included by reference to the remuneration policy approved by the general meeting of shareholders, provided that the incorporation is clear, specific, and concrete. The specific determinations for the current fiscal year must be described, both for the remuneration of directors in their capacity as such and for the performance of executive functions, which the board would have carried out in accordance with the contracts signed with executive directors and the remuneration policy approved by the general meeting. In any case, the following aspects must be reported at a minimum:

• Description of the procedures and bodies of the company involved in the determination and approval of the remuneration policy and its conditions.
• Indicate and, where applicable, explain whether comparable companies have been taken into account to establish the company's remuneration policy.
• Information on whether any external advisor has participated and, where applicable, their identity.
• Relative importance of variable remuneration components compared to fixed ones (remuneration mix) and what criteria and objectives have been taken into account in their determination and to guarantee an adequate balance between the fixed and variable components of remuneration. In particular, indicate the actions adopted by the company regarding the remuneration system to reduce exposure to excessive risks and adjust it to the long-term objectives, values, and interests of the company, which will include, where applicable, a reference to measures provided to ensure that the remuneration policy takes into account the long-term results of the company, measures adopted regarding those categories of staff whose professional activities have a material impact on the risk profile of the entity, and measures provided to avoid conflicts of interest, where applicable. Also, indicate whether the company has established any vesting or consolidation period for certain variable remuneration components, in cash, shares, or other financial instruments, a deferral period for the payment of amounts or delivery of financial instruments already vested and consolidated, or if any clause reducing deferred remuneration or requiring the director to return received remuneration has been agreed upon, when such remuneration was based on data whose inaccuracy was subsequently demonstrated manifestly.

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OFFICIAL STATE GAZETTE No. 171 Monday, July 16, 2018 Sec. I. Page 71170

• Amount and nature of the fixed components that directors are expected to accrue in the fiscal year in their capacity as such.
• Amount and nature of the fixed components that will be accrued in the fiscal year for the performance of senior management functions by executive directors.
• Amount and nature of any remuneration component in kind that will be accrued in the fiscal year including, but not limited to, insurance premiums paid in favor of the director.
• Amount and nature of variable components, distinguishing between short-term and long-term ones. Financial and non-financial parameters, including among the latter social, environmental, and climate change parameters, selected to determine variable remuneration in the current fiscal year, explanation of the extent to which such parameters relate to the performance of both the director and the entity and to their risk profile, and the methodology, necessary timeframe, and techniques provided to determine, at the end of the fiscal year, the degree of compliance with the parameters used in the design of variable remuneration. Indicate the range in monetary terms of the different variable components based on the degree of compliance with the established objectives and parameters, and if there is any absolute maximum monetary amount.