The impact of the Transparency Directive

Overview of the Directive

• Part of the EU Financial Services Action Pl
• an
• Deals with the production of periodic financial information, its dissemination and its storage
• Companies with securities traded on a regulated market
• Accounting periods beginning on or after 20 January 2007
• Requires the existence of a liability regime for issuers in relation to periodic financial information

Overview of the Disclosure and Transparency Rules

The structure of the DTRs

• DTR1 and 1A are introductory
• DTR2: disclosure and control of inside information by issuers
• DTR3: transactions by persons discharging management responsibility and their connected persons
• DTR4: periodic financial reporting
• DTR5: vote holder and issuer notification rules
• DTR6: continuing obligations and access to information

DTR4: periodic financial reporting

• DTR4.1: annual financial report
• DTR4.2: half-yearly financial report
• DTR4.3: interim management statements (IMSs)
• DTR4.4: exemptions

Note that some of the Listing Rules remain

DTR4.1: annual financial report

• Transferable securities/UK Home Member State
• Four months after the year end
• Contents
• Audited financial statements
• Management report
• Responsibility statements
• Consolidated accounts under IFRS, parent accounts as required by law
• Auditing must be according to the Directives
• Content of management report
• Fair review
• Principal risks and uncertainties
• It is required to be forward looking
• Responsibility statements
• Made by “persons responsible within the issuer”
• The board of directors for UK purposes
• State name and function of person making statement
• Statements are:
• Accounts true and fair
• Fair review in management report

DTR4.2: half-yearly financial report

• Shares or debt securities/UK home Member State
• Two months after the period end for first six months
• Contents
• Condensed financial statements
• Interim management report
• Responsibility statements
• Consolidated accounts under IAS 34
• Consistency of lines reported, accounting policies, etc
• No requirement for audit, but any audit/review must be disclosed (or statement that there has been no review)
• Content of interim management report
• Important events in first 6 months
• Principal risks and uncertainties for last 6 months
• Responsibility statements
• Made by “persons responsible within the issuer”
• The board of directors for UK purposes
• State name and function of person making statement
• Statements are:
• Accounts true and fair (NB sufficient to say comply with IAS 34)
• Fair review in management report
  

DTR4.3: interim management statement

• Shares/UK Home Member State
• In the first and second 6 month periods, made between
• 10 weeks after beginning of period, and
• 6 weeks before the end of period
• Contents
• Cover period from start of 6 months to date of publication
• Explanation of material events and transactions
• General description of financial position/performance of issuer
• Exempt if company is a quarterly reporter already

The new liability regime

S 90A FSMA:  Compensation for statements in certain publications: scope

• Applies to
• Any reports issued under Articles 4, 5 and 6, and
• Voluntary prelims
• Articles 4, 5 and 6 refer to the annual financial report, half-yearly financial report and IMS respectively
• Securities must be
• Traded on a regulated market in the UK, and
• Traded on a regulated market outside the UK and UK is home MS

S 90A FSMA:  Compensation for statements in certain publications: liability (also see Section 463 CA 2006)

• Issuer liable to pay compensation to a person who has
• Bought the securities, and
• Suffered loss as a result of the untrue or misleading statement or omission of any matter required to be included in the publication
• Issuer is liable if a person discharging managerial responsibilities
• Knew the statement was untrue/misleading or reckless, or
• Knew the omission to be dishonest concealment of a material fact
• Loss is not suffered unless the investor relied on the information and it was reasonable for him to do so

S 90A FSMA:  Compensation for statements in certain publications: limit on liability

• There is no further liability
• For issuer to any other loss suffered as a result of reliance
• No person other than the issuer is liable other than to the issuer
• Limitation does not affect
• Powers of court/Authority to require restitution
• Liability for a civil penalty
• Liability for a criminal offence
• “Persons discharging management responsibilities” is defined and will usually be directors

How to be compliant

Governance and procedures

• Responsibility statement
• Can be signed by one board member on behalf of board
• Named person’s liability no greater than that of other board members
• Cautionary wording over forward looking statements
• Time line of new reporting deadlines, particularly in transition
• Holistic approach, particularly to narrative reporting
• Corporate governance issues
• Systems and controls, clear reporting lines up to the board
• Finance function up to strength
• Right expertise on the board and audit committee
• Time and attention of board members

The Davies review

Possible changes to the liability regime

• Extend to cover “ad hoc” disclosures
• Extend to cover AIM and PLUS markets (i.e. non-regulated)
• Apply to all RIS announcements
• Extend to encompass liability for dishonest delay
• Extend to both buyers and sellers of shares, but exclude holders

Summary

Will anything change under the new liability regime?

• Shorter timetable for reporting, more reporting
• Clearer liability regime, but investors now have rights to take action
• High hurdle for investors to claim compensation
• Impact of derivative actions?
• Possible future changes to the regime? 

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