Consultation on the modernisation of the Transparency Directive

Transcription

1 1 / 12 Consultation on the modernisation of the Transparency Directive The Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários or CMVM ) would like to welcome the opportunity to present its views on the review of the Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (the Transparency Directive ). This response to the consultation of the European Commission on the modernization of the Transparency Directive (hereinafter referred as the Consultation ) intends to detail the opinion of CMVM on certain specific questions raised, notwithstanding the fact that CMVM s views will also be expressed in CESR s response to this Consultation. Since its adoption,the Transparency Directive, along with Level 2 and Level 3 actions, have contributed decisively to the harmonization of transparency requirements, while allowing very significant improvements in relation to the quality and scope of information disclosed to investors about issuers listed in regulated markets across the EU. There are, however, several matters in which further harmonization would be desirable. Moreover, recent developments in financial markets and the experience gathered by regulators since the implementation of the Transparency Directive have evidenced the need to extend the scope of transparency requirements and to clarify some of its provisions. With this purpose, CMVM hopes to contribute to this Consultation in light of its knowledge and background in implementing and supervising the compliance with the Transparency Directive in Portugal. I. Attractiveness of regulated capital markets for small listed companies. 1. Impact of the Transparency Directive on the attractiveness of regulated markets for small listed companies. Do the Transparency Directive obligations for issuers (e.g. disclosure of annual and half-yearly financial reports, quarterly information etc.) impact on the decisions CMVM - Av. Liberdade n.º 252, LISBOA - PORTUGAL cmvm@cmvm.pt Tel.: (+351) Fax: (+351)

2 2 / 12 of small listed companies to be listed in or to exit regulated markets (e.g. do they act as an entry barrier)? Although not having quantitative evidence on the costs of being admitted to trading on a regulated market, CMVM considers that Transparency Directive (TD) obligations for issuers do not have in general a determinant impact on the decisions of small listed companies to be listed in or to exit regulated markets. Decisions to exit regulated markets seem to be more linked to low levels of free float or low market liquidity as well as to buy-out transactions, and not directly to costs arising from the Transparency Directive. Regarding decisions of small listed companies to be listed on regulated markets, one-off and ongoing costs in adapting and complying with regulatory obligations, notably the costs with adaptation and compliance with IFRS and corporate governance requirements, may be taken into account in such decision. However, CMVM considers that the information and transparency provided by IFRS and in general by the Transparency Directive clearly outweigh such costs, not only by requiring firms to provide more complete and clearer harmonized financial information, thereby facilitating the comparability between issuers and increasing investor awareness and confidence, but also by encouraging better organization of issuers, which is particularly relevant in the case of smaller listed companies. 2. Costs for smaller listed companies. Which are the most important costs for small listed companies associated to compliance with the Transparency Directive (e.g. cost of preparing the accounts, auditing costs, legal costs, cost of making public the information etc.)? Please support your answer with quantitative data. The compliance with IFRS is not an obligation required exclusively by the Transparency Directive and therefore the full costs concerning the preparation and auditing of listed issuers accounts cannot be fully attributed to the Transparency Directive requirements. Although these costs seem to represent an important factor for listed issuers, CMVM considers such costs are clearly outweighed by their benefits, as described above. Additionally, the specific Transparency Directive obligations such as disclosure and dissemination of information are not a source of important costs for Portuguese listed issuers, due to the fact that the Portuguese officially appointed mechanism CMVM s website which is also used as a dissemination mechanism is free of charge. Portuguese issuers are, of course, not prevented from using other methods or service providers to disseminate regulated information.

3 3 / Potential diminution of cost for small listed companies. What changes of the Transparency Directive will bring important reductions in costs for small listed companies? Please provide evidence in support of your answer (see also questions 7 and 8 if you are able to provide more detailed replies). CMVM is in general supportive of measures which allow the reduction of costs and administrative burdens for overall listed issuers, while safeguarding adequate investor protection. However, CMVM does not support the creation of more flexible rules for small listed companies which reduce current investor protection and market transparency. 4. The lower visibility of smaller listed companies. How does the visibility problem materialise (e.g. lower attention of analysts, lower investment levels, lower trading etc.) for (objectively) well performing small companies? Please provide evidence supporting your answer. The problem concerning the lower visibility of smaller listed companies (the so-called black hole problem) should be viewed from two different angles: the market perspective and the regulatory perspective. The low interest shown by analysts and investors in smaller listed companies cannot be solved by any legislative measures. The only exception could be tax policy measures which could incentivize both supply and demand of smaller companies securities. There is a wide consensus that only a change in the behavior of the markets participants would be likely to definitely change this scenario (which could be favored by those tax policy measures). However, regulation does play a role. In theory, regulation can mitigate or exacerbate the underlying market context. In CMVM s opinion, current provisions of the TD regarding the dissemination/storage of regulated information are non-satisfactory, since they intensify or, at least, fail to address the problem concerning the low interest shown by EU investors in smaller listed companies. Considering that it cannot force analysts to pay more attention to smaller listed companies, TD regulation regarding the dissemination/storage of regulated information should facilitate, to the maximum extent possible, easy, low cost and non-discriminatory access to regulated information to all investors. As said before, in CMVM s opinion, the current TD system of dissemination/storage of regulated information is performing under par. On one hand, the targeted EU wide dissemination goal is jeopardized by the lack of interest showed by news providers in smaller listed companies, especially in cross-border situations. On the other hand, TD requirements regarding the storage of regulated information could clearly be enhanced to facilitate EU investors access to regulated information. Dissemination and storage are two sides of the same coin as they share the same objective: facilitate investors access to regulated information. Therefore, and although CESR will soon be

4 4 / 12 presenting a separate report on storage of regulated information, CMVM would like to take this opportunity to underline the main features and advantages of the dissemination/storage system that is in place in Portugal. In Portugal, CMVM s website is the only officially appointed mechanism and is also used as a dissemination mechanism. This system, free of charge to the issuers, simultaneously stores regulated information and produces alerts, both on the website and through s that are sent to a mailing list which is open for subscription, whenever new information is added, independently from the size of the issuer. As said before, issuers are not prevented from using other methods of dissemination with other service providers, and that is usually done to target some specific markets where such issuers are also present. However, the advantage of having the public authority s website playing a role is that all issuers, independently from their size, can trust that a minimum dissemination level is reached, through a mechanism that is widely known and relied upon by markets participants, including cross-border ones. Note that regulated information is transmitted directly by the issuers to the CMVM s website, through an extranet facility. Therefore, it doesn t imply any liability for CMVM, the issuer being fully liable and the information subject to ex-post supervision. Possible options to address in the Transparency Directive the problems related to small listed companies 6. Definition of a small listed company. What would be the optimal definition of a "small listed company" in the context of regular (i.e. after the admission to trading of the securities) transparency requirements? Please justify your replies i) for issuers of shares, those companies with a market capitalisation below a certain threshold such as 100 Million, 250 Million or other (please specify the threshold); ii) for issuers of shares, those companies with a market capitalisation below a certain percentage (e.g. 60%) of the average capitalisation of a company in the regulated market where the company is admitted to trading (please specify the percentage); iii) for issuers of shares, those companies with a market capitalisation below a certain percentage (e.g. 60%) of the average capitalisation of a company in the regulated market(s) of the home Member State of the company (please specify the percentage); iv) for issuers of debt securities only, those companies having outstanding debt securities below a certain threshold (please specify the threshold);

5 5 / 12 v) for issuers of debt securities only, those companies having a turnover below a certain threshold (please specify the threshold) vi) other. CMVM considers that one important obstacle to the establishment of differentiated transparency requirements for small listed companies is the difficulty in reaching a functional definition of small listed company. By way of example, the choice for option i) (market capitalisation below a certain threshold) could create severe instability to issuers, as changes in share prices and market volatility could lead to changes in their qualification as small listed companies and, consequently, to the applicable transparency requirements. Such variation could in fact cause an increase of compliance costs for small listed companies. On the other hand, if the qualification as small listed company would be freezed for a specific period (e.g. 2-3 years), even when its market capitalization is no longer below the relevant threshold, this could lead to unlevel playing field situations in which companies with similar market capitalization would be subject to different transparency requirements. As to options ii) and iii) (market capitalisation below a certain percentage), CMVM considers that such options would have a considerable impact on smaller regulated markets, as a significant number of listed companies (probably the majority) would fall under the category of small listed company and would thus be subject to less stringent transparency requirements. This would reduce considerably market transparency and affect investor protection, while it could also contribute to forum shopping for regulated markets with higher market capitalisation average in order to avoid more stringent obligations. At the most, it could even lead smaller markets to be perceived as second-tier markets as many of the listed companies therein could be categorized as small companies. 7. Potential diminution of cost for small listed companies if changes to the Transparency Directive were to be adopted 7.1. If a differentiated regime for small listed companies is added to the Transparency Directive with a view to reduce the compliance costs of those companies, would it be desirable to prevent Member States/regulated markets from imposing in national law/listing rules more stringent or additional obligations on small listed companies? Considering the position of CMVM to oppose the reduction of current transparency requirements, in such case it would be desirable in principle that Member States/regulated markets should be allowed to impose more stringent or additional obligations on small listed companies in national law/listing rules.

6 6 / 12 Additionally, if a differentiated regime were to be adopted for small listed companies, such issuers should in any case have the option to be subject to a higher disclosure regime, since they may not want to reduce their disclosure standards due to the negative impact of such decision on the interest of investors in the company Do you think that an extension of the deadline for the publication of financial reports would imply a reduction in legal, auditing or other type of costs? Please provide evidence supporting your answers (e.g. how much the cost would be reduced depending on the extension of the deadline)? CMVM has no definite evidence that an extension of the deadline for the publication of financial reports would result in a significant reduction in legal, auditing or other type of costs Do the various rules requiring the disclosure by listed companies of reports of narrative nature bring significant costs/operation complexity for small listed companies (e.g. legal, account preparation, auditing, other type of costs)? Please provide evidence in support of your answer. CMVM has no definite evidence that requiring the disclosure by listed companies of reports of narrative nature brings significant costs or operation complexity for small listed companies. It should also be pointed out that the narrative nature of reports allows the disclosure and clarification of important information about listed issuers Would you see benefits from integrating in the Transparency Directive the disclosure obligations mentioned in question ([7].3) which are currently in different directives? Please explain you reply (e.g. rules would be more clear, the Home Member States rules would clearly apply, etc). CMVM would support an integration of the disclosure obligations of the Transparency Directive mentioned in question 7.3, notably the corporate governance statements. That would bring more legal certainty, better harmonization and, most important, would make clearer the responsibilities of European Securities Regulators in this regard. 8. Diminution of cost for small listed companies vs. diminution of transparency to the market.

7 7 / Is it possible to apply lighter transparency obligations for small listed companies without a corresponding significant diminution of transparency provided to the market? Please provide evidence supporting your answer. As stressed above, CMVM considers that if small listed companies would be subject to different transparency obligations, this should not result from a reduction of current obligations since this would necessarily result in a diminution of the level of transparency provided to investors If the obligation to disclose quarterly financial information was waived for small listed companies, would this result in an unreasonable diminution of transparency? Please provide evidence supporting your answer. CMVM considers that quarterly information, either quarterly financial reports or interim management statements should not be abolished. The possibility of disclosing interim management statements as currently foreseen under TD regime should be maintained, as small listed companies can clearly take advantage of it. In Portugal, larger listed companies are required to publish quarterly financial reports in accordance with IAS 34. Differently, smaller listed companies are allowed to publish interim management statements, including some quantitative data (including synthetic turnover, EBIDTA, net results and, from the balance sheet, equity, total assets and total liabilities) as required by a CMVM s regulation. Our experience shows clear advantages resulting from having more detailed rules regarding the content of interim management statements (including quantitative data), notably in terms of higher harmonization and quality of the information transmitted to the market. Academic studies concerning the Portuguese market have also confirmed that quarterly information that includes condensed income statements and balance sheets, even if unaudited, convey enough new information to the market to spur significant price and trading reactions. 1 CMVM is of the view that at the European level, ESMA would be ideally placed to develop technical standards in this regard. 9. Addressing the lower visibility of smaller listed companies 9.1. Do you think that measures at EU level (including possible changes to the Transparency Directive) can help solving the lower visibility of smaller listed companies? -(i) Yes (see next question) 1 Alves, Carlos F. and Teixeira Dos Santos, F. (2008) 'Do First and Third Quarter Unaudited Financial Reports Matter? The Portuguese Case', European Accounting Review, 17:2,

8 8 / 12 -(ii) No, it is an structural problem or a market feature (e.g. size matters etc.) which EU measures will not be able to solve (please explain). Yes What type of measures at EU level could help solving the visibility problem of small listed companies? -i) The Transparency Directive should contain differentiated rules for small listed companies regarding timing and/or methods for the disclosure and dissemination of information (please explain); -ii) there are rules in other EU directives (e.g. prudential requirements) and/or national law (e.g. tax law) which discourage financial analysts and intermediaries' interests in small listed companies which should be modified (please explain) -iii) financial analysts and intermediaries should get incentives to interest themselves in small listed companies (please explain); -iv) other (please explain). Other. Please refer to answer to question 4 above Do you think that the development of an EU database storing regulated information on all issuers of securities in the EU will facilitate research and create interest/result in greater attention in small listed companies by financial analysts, financial intermediaries and investors? Please explain. Yes. CMVM considers that the development of an EU central access point for regulated information of issuers listed in regulated markets would be an important instrument to increase market transparency across the EU and would facilitate increased visibility of listed issuers by providing a centralized and an easily accessible searching tool for investors and analysts. II. Information about holdings of voting rights. Disclosure of holdings of cash-settled derivatives.

9 9 / Would the disclosure of holdings of cash-settled derivatives be beneficial to the market? Please provide evidence supporting your answer (e.g. situations in which lack of disclosure of cash-settled derivatives produced negative results). Please report about your experience, if any, with the disclosure of cash-settled derivatives in the United Kingdom and/or in other jurisdictions where cash-settled derivatives are disclosed (such as in Switzerland). CMVM considers that the disclosure of CSD would significantly increase market transparency. As described in CESR s consultation on the extension of major holdings notifications to instruments of similar economic effect to holding shares, several cases occurred in Europe and the U.S. within the last years (e.g. Continental/Schaeffler, Porsche/VW, FIAT, CSX/TCI and Implenia/Laxey) which have provided sufficient evidence to the need for requiring the disclosure of CSDs. These cases demonstrated that CSD have the ability to cut across the TD, by allowing to build up stakes and/or to exert influence over corporate governance, without adequate disclosure to the market. In certain situations, CSD do fall under the scope of article 10 of TD, through the holding on behalf clause of paragraph g). However, CMVM considers that these instruments should be reported in general even if not falling under the scope of article 10(g) of TD. 12. If the Transparency Directive was to require holders of cash-settled derivatives to disclose their positions, should holdings of cash-settled derivatives be aggregated to holdings of voting rights and/or of financial instruments giving unconditional access to voting rights for the purposes of calculating whether the threshold triggering the disclosure obligation is reached or crossed? CMVM supports further harmonization of major shareholdings notifications. In an effort to achieve this, CMVM may support a common disclosure mechanism as better described in CESR s response to the Consultation which would include four categories of holdings ("baskets") that trigger the notification obligation independently of holdings in other categories: (i) actual voting rights (Article 9 + Article 10 holdings), (ii) Article 13 instruments, (iii) cash settled instruments and (iv) total holdings (i.e. (i)-(iii) aggregated). Whenever a threshold is crossed in one of these baskets, holdings in all baskets would have to be disclosed. If thresholds are crossed in more than one basket, only one legal notification obligation would arise. The four baskets are illustrated in the table below. TD Art. 9 and Art. 10 holdings TD Art. 13 holdings Holdings of CSD Total holdings It is important to point out that an essential feature of this 4-basket mechanism would be the aggregation of all categories of holdings, including Article 13 financial instruments and CSD, in the 4 th basket, which CMVM considers is a necessary element in order to establish an effective major holdings disclosure system.

10 10 / 12 Additionally, if the 4-basket system described above is adopted, CMVM believes that a common disclosure mechanism could only efficiently achieve further harmonization if Member States are required to provide the same threshold for all baskets. Otherwise, such discretions could frustrate the harmonization efforts to be pursued with the adoption of a common disclosure mechanism. Transparency of holdings of voting rights after the record date in advance of the general meeting of shareholders (the question of empty voting) 13. Would the establishment of a specific disclosure mechanism for holders of voting rights who do not hold shares between the record date and the shareholders meeting be useful/effective to prevent empty voting practices? (i) yes (please explain); (ii) no, only limiting/prohibiting empty voting practices would be effective. Yes. Holding voting rights without holding the respective shares is just one kind of empty voting practices (i.e. holding/exercising voting rights without economic exposure). Empty voting usually refers to the use of a number of legal devices (e.g. short positions, stock lending or record-date capture ) which all have in common the limitation or inexistence of economic exposure of shareholders to the voting rights held or exercised. CMVM considers that more transparency on empty voting practices is desirable. For example, within the implementation of the Shareholders Rights Directive (2007/36/CE) into Portuguese law, a provision was adopted according to which a shareholder who disposes of its shares between the record date and the end of the general meeting is required to immediately inform the Chairman of the general meeting and the CMVM of such disposal. This provision addresses the record date capture problem and allows increased market transparency on these practices. Other empty voting practices, notably holding short positions to limit/eliminate the shareholder s economic exposure, should also be disclosed to the market. Therefore, at this stage, CMVM supports the establishment of a specific disclosure mechanism that addresses empty voting practices, in which major shareholders would be required to provide information on the amount of voting rights held without economic exposure above a relevant threshold, including through any disposal or borrowing of shares. This information would be provided immediately during the period between the record date and the general meeting.

11 11 / 12 The disclosure of this information would allow increased market transparency on empty voting practices, while at the same time provide the opportunity for regulators to collect information on potential cases of empty voting in order to assess the extent of these practices and to determine the need to approve more stringent measures, if necessary. The concrete rules of such disclosure mechanism would have to take into account the shortselling in order to avoid duplicate and unnecessary notifications which could be counterproductive to the markets transparency. Aggregation of holdings and voting rights. 17. Should holdings of shares and voting rights be aggregated with holdings of financial instruments giving unconditional access to voting rights for the purposes of calculating the relevant thresholds that trigger the notification obligation? Please justify your reply. CMVM supports a harmonized disclosure mechanism under which holdings of voting rights (Basket 1) and holdings of financial instruments giving unconditional access to voting rights (Basket 2) as well as CSDs under Basket 3 - are notified separately and in aggregate under Basket 4, according to the relevant threshold. CMVM considers that, in order to calculate the relevant thresholds that trigger the notification obligation, a major holdings disclosure mechanism must take into account the variety of instruments at the disposal of participants which could be used to build-up major holdings. Therefore, the aggregation of voting rights with holdings of financial instruments giving unconditional access to voting rights is fundamental to achieve effective market transparency and avoid creeping control. III. Ineffective application of the Directive because of diverging national measures and/or unclear obligations in the Directive Uniform EU Regime or maximum harmonisation: major holdings of voting rights. 19. Would it be desirable to set up a uniform EU regime (e.g. by a directly applicable EU Regulation) for the notification of major holdings of voting rights? Please justify your reply by describing any legal obstacles (e.g. related to civil or company law) to such uniform EU regime.

12 12 / 12 As described in the answer to question 12.1 above, CMVM supports in principle the maximum harmonization of major holdings notifications. However, there may exist several difficulties in achieving full harmonization due to close links of thresholds with differences across the EU regarding the size of capital markets, market capitalisation of listed companies and level of fragmentation of ownership. The obstacles resulting from differences between Member States on these issues may result, for example, in the need to leave some national discretion to Member States on the relevant thresholds in order to take into account not only the local regulated markets structure but also the standard majorities provided by national company laws or in the companies articles of association. Such differences are also of particular relevance for purposes of the exemptions allowed by the TD, which could limit the scope for maximum harmonization. For example, Portugal did not implement the trading book exemption provided in Article 9(6) of the Transparency Directive. Although we fully share the goal of further harmonization, CMVM would not be willing to support the trading book exemption as it currently stands. CMVM would only support it being maintained if substantive modifications would be introduced. 20. If a fully uniform EU regime is not possible because of insurmountable legal barriers, should Member States be prevented from adopting more stringent requirements than those of the Transparency Directive regarding the notification of major holdings of voting rights? CMVM considers that a common disclosure mechanism (which could however leave some national discretion to Member States to specify the thresholds applicable in their territory), would significantly reduce current differences among Member States regarding notifications of major holdings. CMVM also believes that if a maximum harmonization approach is adopted regarding exemptions, some elements of the current rules, notably the trading book exemption, would have to be modified as referred in the previous answer.