Guidelines on Appropriate Protection Mechanisms Against the Risk of Issuers Failing to List Recently Issued Transferable Securities and Money Market Instruments on a Regulated Market

The Croatian Financial Services Supervisory Agency (hereinafter: Hanfa), pursuant to Article 15(4) of the Act on the Croatian Financial Services Supervisory Agency (Official Gazette Nos. 140/05 and 12/12) and Article 125(6) and Article 211.a of the Act on Mandatory Pension Funds (Official Gazette Nos. 19/14, 93/15, 64/18 and 115/18, 58/20, 156/23), at the meeting of its Management Board held on September 4, 2024, hereby adopts

GUIDELINES ON APPROPRIATE PROTECTION MECHANISMS AGAINST THE RISK OF ISSUERS FAILING TO LIST RECENTLY ISSUED TRANSFERABLE SECURITIES AND MONEY MARKET INSTRUMENTS ON A REGULATED MARKET

INTRODUCTION Pursuant to Article 125(1)(9) of the Act on Mandatory Pension Funds (Official Gazette Nos. 19/14, 93/15, 64/18 and 115/18, 58/20, 156/23, hereinafter: MPFA), the assets of a pension fund may, among other things, consist of recently issued transferable debt securities, money market instruments, and transferable equity securities that are not listed on a regulated market at the time of their acquisition, provided that they will be listed within one year from the date of issue or from the date of publication of the decision by the competent issuer authority regarding listing (hereinafter: listing). Furthermore, Article 125.a(1) of the MPFA stipulates that when a pension company invests pension fund assets in securities or money market instruments under Article 125(1)(9) of the MPFA, the pension company must submit to Hanfa within three working days after the investment is made:

1. an investment analysis, particularly regarding the risks and returns of that investment, which contains clearly defined investment objectives, the strategy by which those objectives are intended to be achieved, timeframes and monitoring of strategy implementation and success in achieving the objective, conflict-of-interest management, as well as an exit strategy in case of failure or fulfillment of investment objectives;
2. an analysis of procedures in the event of unlisted securities and money market instruments, which includes a description of the prescribed protection mechanisms in case of failure to fulfill issuer obligations, particularly the listing obligation; and
3. other documentation, upon Hanfa's request. In accordance with Article 125(6) of the MPFA, Hanfa adopts these Guidelines describing appropriate protection mechanisms against the risk of issuers failing to list on a regulated market recently issued transferable debt securities, money market instruments, and transferable equity securities that are not listed on a regulated market at the time of their acquisition (hereinafter: protection mechanisms or safeguards). Additionally, pursuant to Article 211.a of the MPFA, Hanfa is authorized to inform certain groups of supervised entities and other addressees through various types of publications (instructions, guidelines, etc.) regarding the explanation or method of application of certain regulations within its competence or related general legal acts. Accordingly, Hanfa adopts these Guidelines on Appropriate Protection Mechanisms Against the Risk of Issuers Failing to List Recently Issued Transferable Securities and Money Market Instruments on a Regulated Market (hereinafter: Guidelines) and informs pension companies about appropriate protection mechanisms.

MANAGING THE RISK OF UNLISTED STATUS ON A REGULATED MARKET When investing pension fund assets in transferable securities or money market instruments that are not listed on a regulated market at the time of their acquisition, attention must be paid to the fact that the risk of them remaining unlisted on a regulated market, however small, always exists and must be recognized and managed in an adequate and proportional manner. Such risk constitutes part of the compliance risk of a pension company's and pension fund's operations with relevant regulations, because realization of such risk would result in the pension fund's assets being invested in assets into which they are not permitted to be invested under the MPFA. Therefore, pension companies are expected to primarily identify the existence and level of unlisted risk and to manage this risk particularly cautiously at each stage of the investment cycle (risk-based approach). This includes, among other things, planning scenarios that a pension company will undertake to reduce unlisted risk and planning procedures in case the aforementioned risk materializes, i.e., if transferable securities or money market instruments are not listed on a regulated market within the prescribed timeframe. Regarding the identification of unlisted risk, this must be conducted before making a decision to invest pension fund assets. All circumstances of the potential investment should be taken into account to recognize what the actual unlisted risk on a regulated market is in relation to the specific investment, for example, what type of transferable security or money market instrument is involved, what the issuer's financial stability is, whether the issuer already has transferable securities or money market instruments listed on a regulated market, whether a prospectus for listing and trading on a regulated market has already been prepared for the financial instrument in question, whether the pension fund already holds a stake and what that stake is, as well as other circumstances that may affect the assessment. Following this assessment, pension companies must establish adequate protection mechanisms so that, in accordance with the assessed actual level of unlisted risk on a regulated market, such risk is minimized as much as possible, or in case of risk realization, damage to the interests of fund members is minimized as much as possible or completely avoided. It is particularly emphasized that more precisely prescribing the conditions and possibilities for using certain protection mechanisms in specific situations through these Guidelines is not feasible, as doing so could potentially be restrictive for pension companies when making investment decisions. Furthermore, these Guidelines are not aimed at achieving uniform treatment by pension companies when establishing protection mechanisms, because each pension company adapts its procedures to its own strategies, objectives, and needs; rather, they point out that due attention should be paid to managing unlisted risk at each stage of the investment cycle. Therefore, Hanfa below provides examples of good practice for establishing protection mechanisms.

EXAMPLES OF GOOD PRACTICE As appropriate protection mechanisms in case of an issuer's failure to list recently issued transferable securities and money market instruments on a regulated market, the following options may be used. It is particularly important to note here that the listed examples of good practice are provided illustratively and that this list does not by any means represent a closed list of mechanisms that may be used, but serves exclusively as an indicator to pension companies on how to establish and use protection mechanisms. a) Contracting the obligation for the issuer to prepare a listing prospectus before the investment of pension fund assets is made, and submitting the relevant prospectus to Hanfa or the competent authority of another Member State for approval immediately upon issuance. This obligation may be contracted as a termination condition in the investment agreement. In this way, the issuer is encouraged to prepare the listing prospectus even before the investment itself, and after issuance, the obligation remains to submit the prospectus to Hanfa or the competent authority of another Member State for approval, which significantly accelerates the process of fulfilling listing conditions and contributes to reducing the risk that it will not be approved or that listing will not be completed within the statutory timeframe. b) Ensuring the possibility of dismissing members of the issuer's management board through supervisory board control. In case of delay or failure to fulfill the obligation to prepare a prospectus or submit an application for approval of the listing prospectus to Hanfa or the competent authority of another Member State within a specified timeframe, the supervisory board may dismiss management members and appoint new ones, with an obligation to promptly implement the shareholders' meeting decision on listing on a regulated market. A pension fund or group of pension funds ensures supervisory board control by acquiring a majority stake in the issuer's share capital, and thus a majority of votes at the general meeting, and consequently the ability to decide on the appointment and dismissal of supervisory board members. In case of acquiring a minority stake in the issuer's share capital, control in the supervisory board can be ensured by a pension fund or group of pension funds based on provisions of the issuer's statutes. c) Contracting personal liability of the issuer's management members for preparing a prospectus and submitting an application for approval of the listing prospectus to Hanfa or the competent authority of another Member State within specified timeframes. In case of delay or failure to fulfill obligations within specified timeframes, management members are obliged to pay a contractual penalty to the pension fund. This mechanism additionally encourages management members, who operationally manage the relevant process, to ensure compliance with contracted timeframes so that the issuer fulfills its listing obligation within one year. d) Contracting the obligation for regular reporting by the issuer to the pension company on the progress of the listing process on a regulated market. In this way, the pension company can monitor the course of the aforementioned process and react in other ways if it assesses that it is not proceeding at a satisfactory pace, thereby increasing the risk of unlisted status within the prescribed timeframe. e) Establishing dialogue with issuers regarding the quality of the prospectus submitted to Hanfa or the competent authority of another Member State. Since contracting protection mechanisms such as preparing and submitting a prospectus within a specified timeframe must not be an end in itself, attention must be paid to the quality of the listing prospectus. By establishing this mechanism, the pension company gains additional control and insight into the prospect preparation process, all with the ultimate goal of ensuring timely listing on a regulated market. f) Contracting the obligation for the issuer to pay a contractual penalty in case of rejection of the listing prospectus approval by Hanfa or the competent authority of another Member State due to statutory deficiencies. In this way, attempts are prevented by issuers to circumvent contractual provisions on prospect preparation and submission timeframes by submitting an extremely deficient prospect that does not meet the minimum statutory criteria for approval to Hanfa or the competent authority of another Member State. g) Contracting the issuer's obligation to ensure listing on a regulated market within a timeframe shorter than the statutory one-year period, with an obligation to pay a contractual penalty in case of delay or failure to fulfill the aforementioned obligation. In this way, issuers are encouraged to carry out all necessary actions before the expiration of the statutory timeframe to fulfill their listing obligation, which allows the pension company a certain period (from the expiration of the relevant timeframe to the expiration of the one-year period from the date of issue) to react in other ways and prevent the realization of unlisted risk. h) Contracting the obligation for the issuer to pay a contractual penalty in case of unlisted status within the statutory one-year period. i) Contracting the obligation for the issuer to compensate the full amount of damage incurred by the pension fund in case of unlisted status within the statutory one-year period. j) Contracting the obligation for the issuer to repurchase transferable securities or money market instruments in case of unlisted status within the statutory one-year period at a pre-defined price. Before contracting this protection mechanism, an adequate analysis of the issuer's financial stability must be conducted to assess whether the issuer will be financially capable of fulfilling the contracted obligation upon its maturity. k) Establishing a lien on specific assets (e.g., the issuer's or majority owner's assets) in favor of the pension fund, as a means of securing the listing obligation or the aforementioned contractual obligations. When contracting this mechanism, attention must be paid to the types of assets into which a pension fund is permitted to invest under Article 125(1) of the MPFA, so as to avoid situations where a pension fund might acquire assets in an eventual enforcement proceeding into which it is not permitted to invest. l) The obligation to obtain a bank guarantee as a means of securing the aforementioned contractual obligations. In conclusion, it is emphasized that the assessment of the adequacy and extent of protection mechanisms to be used depends on the specific level of risk regarding the issuer's failure to list transferable securities or money market instruments on a regulated market, which a pension company is obliged to assess as the first step in the unlisted risk management process. It is particularly important to note that contracting any of the aforementioned protection mechanisms must not be an end in itself, and attention must be paid to the consequences that will occur if conditions for the maturity of any contracted obligations are met.

INFORMING HANFA ABOUT THE IMPLEMENTED INVESTMENT When a pension company has acquired, on behalf of a mandatory pension fund, recently issued transferable debt securities, money market instruments, or transferable equity securities that are not listed on a regulated market at the time of their acquisition, and for which the issuer has submitted an application for listing and trading on a regulated market or a prospectus related to the issuance (public offer) and listing has already been approved, the obligation to prepare an analysis of procedures in case of unlisted status under Article 125.a(1)(2) of the MPFA is considered fulfilled by stating the aforementioned circumstance.

TRANSITIONAL AND FINAL PROVISIONS Hanfa will review these Guidelines and their application and implementation, and will revise them as necessary. These Guidelines are published on Hanfa's website and enter into force upon publication. CLASS: 011-01/24-03/06 REGISTRATION NO.: 326-01-70-72-24-1 Zagreb, September 4, 2024. CHAIRMAN OF THE MANAGEMENT BOARD Dr. sc. Ante Žigman