Memorandum submitted by the London Stock Exchange
1.1 We are pleased to respond to the Treasury Committee's inquiry into the regulation of public limited companies.
1.2 The London Stock Exchange ("the Exchange"), as a listed company, has a preferred commercial interest in ensuring the quality of the securities markets we operate, on top of a formal statutory responsibility to ensure orderly markets.
1.3 Rather than seeing compliance as a formal box-ticking exercise, we see it as a means of achieving our aims:
(a) Providing companies with efficient access to our markets for their listed securities;
(b) Promoting investor confidence in the market as a whole;
(c) Maintaining the quality and attractiveness of our markets to companies and investors; and
(d) Operating orderly markets.
1.4 Our submission outlines the Exchange's role of market supervision. We also set out our commitment to promoting high standards of transparency and disclosure across the UK, and evolving European Union (EU), framework of financial regulation.
2. HIGH QUALITY MARKET SUPERVISION
2.1 The Exchange is a Recognised Investment Exchange ("RIE") under the Financial Services and Markets Act 2000 ("the Act"). As one of eight RIEs operating in the UK, the Exchange devotes significant resources to high quality market supervision in support of the Financial Services Authority (FSA).
2.2 The recognition requirements applying to RIEs are set out in the Act. Detailed requirements are set out in the FSA's RIE sourcebook.
2.3 In May 2000, following the demutualisation of the Exchange into a commercial company, responsibility for the UK Listing Authority ("UKLA"), the body that approves the official listing of companies, was transferred from the Exchange to the FSA. The Act imposes this requirement on the FSA and gives the necessary powers to the UKLA.
3. DELIVERING FULL INFORMATION TO THE MARKET
3.1 Beyond our formal role of market supervision, we support the highest standards of market transparency and company disclosure.
3.2 UK companies are required by the UK Listing Authority to disclose to the market all price sensitive information. This information has traditionally been communicated through our RNS Company News Service. Since April, the market has been opened up to other providers. At present, RNS publishes over 150,000 regulatory disclosure announcements a year to a global audience of 250,000 investor terminals.
3.3 We believe that the requirement to release immediately all price sensitive information, complemented by the preparation of annual and interim accounts is highly transparent, provides full information to investors and is flexible to the needs of issuing companies. We do not believe that a statutory requirement to report quarterly should be seen as a substitute for immediate disclosure of all price sensitive information.
3.4 We understand that the US is moving towards the UK position of requiring greater immediate disclosure of key financial information. Following the collapse of Enron, the House of Representatives' Financial Services Committeeamong other bodiesis examining the issue of corporate disclosure. This follows President Bush's Ten Point Plan on Corporate Responsibility, one of which states that: "Each investor should have prompt access to critical information."
3.5 The House Committee has drawn up a Corporate and Auditing Accountability, Responsibility and Transparency Bill. This would require issuers with securities registered under Section 12 of the Securities Exchange Act of 1934 to make further real time disclosures of information concerning the issuer's financial condition and operations. The SEC strongly supports this initiative.
3.6 As a first step towards meeting this objective, the Commission will expand the list of significant events requiring current disclosure. At present, SEC only requires immediate disclosure of the "Material Unscheduled Events", such as significant management changes, restatements of earnings, change in or disagreement with auditors and actions by a government agency. Harvey Pitt, Chairman of the SEC, has said that this could be extended to include changes in rating agency decisions, obligations that are not currently disclosed and lock-out periods affecting employee stock-ownership plans.
4. PROMOTING INTERNATIONAL ACCOUNTING STANDARDS (IAS)
4.1 Accurate, transparent and meaningful financial reporting is an essential attribute of a capital market and financial system in which investors can place confidence and which can efficiently allocate capital. The Enron collapse highlights the need for broadly accepted, up-to-date international standards. They would help discipline the auditing process and encourage effective and consistent enforcement by national and international authorities.
4.2 The Exchange, as one of the most international exchanges in the world, believes that the evolution of a mutually agreed set of accounting standards would contribute significantly to the promotion of cross-border capital flows. To this end, we support the continuing work of the International Accounting Standards Board (IASB) under the chairmanship of Sir David Tweedie.
4.3 We are aware of the two major practical difficulties of the status quo:
a. Issuing companies seeking to raise capital in overseas jurisdictions are forced to prepare financial statements using more than one set of accounting standards. This raises their cost of capital and forces them to incur valuable time and expense in the process.
b. Investors (and analysts) who wish to compare companies from different countries are currently forced to understand many different sets of accounting requirements. This causes additional costs for them and creates entry barriers that impede competition. Also, many potential investors inevitably have less detailed knowledge of national accounting requirements. This leads to sub-optimal investment and resource allocation decisions and causes investors to seek a risk premium, which raises a company's cost of capital.
4.4 Under the 1985 Companies Act, UK companies listed on the Exchange must follow UK GAAP. Overseas listed companies may follow IAS, UK GAAP, US GAAP, or other national GAAPs, in which case reconciliation to IAS or UK GAAP may sometimes be required. The Exchange accepts IAS on their merits as high-quality standards that aid transparency and decision-making.
4.5 Following agreement in the Parliament in March, the EU is on course to agree the Commission proposal for a Regulation to mandate IAS by 2005 for the consolidated financial statements of all EU listed companies. Other major trading partnersJapan, Canada and Australiaare also strongly supporting the initiative.
5. DEVELOPMENT OF THE EUROPEAN SINGLE MARKET IN SECURITIES TRADING
5.1 We are committed to promoting high standards of transparency and disclosure within the EU as a single market in securities trading is gradually introduced.
5.2 The next year will see further changes to the European regulatory landscape as the EU looks to develop and introduce a range of Directives to integrate further the single market. We have taken a key role in influencing positive change from the EU and have worked with customer groups such as the European Securities Forum to promote open and accessible trading practices and internationally respected standards of market regulation.
11 April 2002
4 Part XVIII, Chapter 1. Back
5 Chapter 9, UKLA Listing Rules. Back
6 HR 3763. Back
7 According to Paul Volcker, Prepared Testimony, US Senate Committee on Banking, Housing and Urban Affairs. Back