5 Transparency
in trading of securities
| (24415)
8062/03
COM(03)138
| Draft Directive on harmonisation of transparency requirements with regard to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC.
|
| Legal base | Articles 44 and 95 EC; co-decision; qualified majority voting
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| Document originated | 26 March 2003
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| Deposited in Parliament | 8 April 2003
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| Department | HM Treasury
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| Basis of consideration | EM of 30 April 2003
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| Previous Committee Report | None
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| To be discussed in Council | No date known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
5.1 The EU's Financial Services Action Plan (FSAP), published
in May 1997, focuses on legislative action necessary to establish
an integrated European financial services market. The FSAP is
a key priority of the Lisbon Agenda of economic reform.
The document
5.2 The draft Transparency Directive (TD) proposed by the Commission
is part of the FSAP, particularly what the Commission refers to
as a "disclosure and transparency agenda". It would
establish rules on periodic financial reports and disclosures
of major shareholdings for companies whose securities are trading
on a regulated market in the Community. It has been brought forward
at a time when there is greater international focus on financial
reporting and corporate governance. The Commission says the draft
Directive seeks "to impose a level of transparency and information
commensurate with the aims of sound investor protection and market
efficiency."
5.3 Current Community legislation governs ongoing disclosure in
many European capital markets, and sets minimum standards for
financial reporting and disclosure. The more important changes
in the draft Directive include:
- extending the scope of legislation from those securities subject
to listings rules ('listed' securities) to securities traded on
regulated markets. This would follow the recently adopted Market
Abuse Directive[6] and
the Prospectus Directive,[7]
both of which relate to regulated markets. It also builds on the
International Accounting Standards (IAS) Regulation,[8]
which requires Community-incorporated companies whose securities
are traded on regulated markets in the Community to conform with
international accounting standards. It would repeal certain aspects
of the Consolidated Admission and Reporting Directive (CARD),
2001/34/EC,[9] relating
to 'listed' securities;
- setting more demanding timetables for financial reporting
by issuers of securities, including disclosure of an annual financial
report within three months;
- requiring more frequent periodic reporting, including having
issuers of shares produce quarterly reports for the first and
third quarters, and a more demanding half-yearly report based
on international accounting standards. It would require issuers
of debt securities in many cases to introduce half-yearly reports;
- requiring more frequent and more stringent disclosures of
changes to major shareholdings;
- changing the jurisdictional basis for some issuers of securities,
from that of the market on which they are traded to their state
of incorporation.
5.4 In her Explanatory Memorandum of 30 April 2003 the Financial
Secretary to the Treasury (Ruth Kelly) tells us that the draft
Directive would be, in some matters, compatible with UK standards,
which are often higher than present Community minimum requirements.
But for other matters current UK arrangements would need to be
changed. She says: "The proposal would broaden the scope
of EC legislation in this area and would impact on current UK
law in a number of other significant ways."
5.5 The Minister comments that the wider scope of the legislation
would lead to a wider category of securities and issuers being
subject to regulation by the Financial Services Authority (FSA).
She notes the other significant matters as:
- the application of listing rules to issuers incorporated outside
the UK. The draft Directive would allow a Member State to require
issuers of securities listed within its jurisdiction to comply
with additional disclosure requirements and other obligations
only if the Member State was the issuer's 'home state' —
for issuers of equities and low-denomination debt securities this
means the issuer's country of incorporation. The FSA could not
make additional disclosure requirements for issuers incorporated
elsewhere in the Community seeking admission to the UK's Official
List.
- a requirement for quarterly reporting for all issuers of shares
trading on a regulated market. At present UK requirements for
quarterly reporting are not universal. The draft Directive would
require all issuers with equities admitted to trading on a regulated
market within the Community to disclose quarterly financial information
at the end of the first and third quarters;
- tighter deadlines for the production of annual financial reports
requiring disclosure of annual reports and accounts within three
months of the end of the financial year. UK public companies are
required currently to lay their annual reports and accounts, once
approved and audited, before the general meeting, and to submit
them to the Registrar of Companies within seven months. Listed
companies are required to publish the same reports and accounts
as soon as possible after approval by directors and in any event
within six months, while Alternative Investment Market companies
are required to publish audited accounts and send them to their
shareholders without delay and in any event within six months.
The Listing Rules also require listed companies to issue preliminary
statements of their annual results within 120 days at most;
- an uncertain impact on the liability of issuers for ongoing
disclosures. It is not clear whether the draft Directive would
require the UK to extend liability to the board of directors or
to individual directors who sign statements reports and accounts,
or to both. In addition, it is not clear whether the UK would
have to change its existing law on civil liability so that it
gives a remedy to investors who have relied on financial reports;
- changes to the requirements for disclosing major shareholdings,
especially the exemptions that apply: existing exemptions for
market makers would need to be removed; where disclosure of shareholdings
at 10% is required (rather than the norm of 3%) the threshold
would be reduced to 5%; change might be needed to ensure the identification
of those who control a company; and there would be new requirements
for any one acting as a proxy to disclose when the shares represent
5% or more of the voting rights;
- the use of proxies and of electronic communication with shareholders.
The draft Directive would require approval by the general meeting
before a company may use electronic communications with shareholders.
Such approval is not currently required by UK law;
- information dissemination by issuers not incorporated in the
UK, but with securities trading on regulated markets operating
in the UK. At present the Listing Rules require all issuers of
listed securities to disclose certain information 'without delay'
to the market. However, the draft Directive prohibits 'host' Member
States from requiring issuers, in meeting these responsibilities,
to do anything other than publish regulated information on their
Internet sites, and to alert interested persons, without delay,
to any new disclosure by electronic means; and
- the treatment of issuers with securities trading on wholesale
markets. The draft Directive would provide for less onerous disclosure
requirements for issuers of high-denomination (at least €50,000)
debt securities.
The Government's view
5.6 The Minister comments on only some aspects of the draft Directive
mentioned in the previous paragraph. On application of listing
rules to issuers incorporated outside the UK she says:
"In certain respects the provisions that prevent host states
from making additional ongoing disclosure requirements of issuers
represents a positive development, in that it helps maintain the
integrity of the passport for issuers provided for under the Prospectus
Directive. However, this might result in a need for the UK's listing
regime to be modified."
5.7 On the uncertain civil liability position she notes:
"Either of these extensions [to directors and for investors
relying on financial reports] to UK law would be a significant
change."
5.8 Of the provision on proxies and electronic communication she
says:
"The Government welcomes the steps taken in Article 13 to
require all EC companies to allow proxy voting and to permit EC
companies to use electronic communications, including electronic
proxies….. The Government does not, however, believe that
companies should be required to obtain approval from the general
meeting for the use of electronic communications, as the proposal
would require. Such an obstacle could inhibit the use of electronic
communications, and is unnecessary."
5.9 The Minister has provided a Regulatory Impact Assessment for
the draft Directive. Referring to the Commission's stated objective
of imposing transparency obligations consistent with both investor
protection and market efficiency, she comments that "as the
proposal is currently drafted, it is possible that the additional
costs on companies raising capital in the EC could outweigh the
predicted benefits for investors in greater transparency".
She also tells us that her Department is consulting informally
representatives of the financial services industry and other interested
parties about the draft Directive.
Conclusion
5.10 This is an important proposal and
may, as the Minister indicates, bring significant changes to UK
law. The Minister outlines the implications of the major changes.
But she gives a clear indication of the Government's attitude
on these matters only in relation to three points. Moreover, although
support for the overall thrust of the draft Directive is implied
in the Explanatory Memorandum, there is
no explicit comment on the Government's general attitude to the
proposal.
5.11 We note the Treasury's ongoing consultations
with interested parties and invite the Minister to let us have
an account of the views of these parties. We also invite her,
in the interests of transparency in the legislative process, to
let us have a more explicit statement of the Government's view
of the overall intention of the draft Directive and of its more
important provisions, as they affect the UK situation. Meanwhile
we do not clear the
document.
6 (22473) 9763/01; see HC 152-xxii (2001-02), paragraph
16 (20 March 2002). Back
7
(23771) 11502/02; see HC 152-xxxviii (2001-02), paragraph 28 (16
October 2002) . Back
8
(22162) 6365/01; see HC 152-i (2001-02), paragraph 53 (18 July
2001). Back
9
(21513) 10690/00; see HC 23-xxvii (1999-2000), paragraph 26 (25
October 2000). Back
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