15 May 2015 European Commission Directorate General for Financial Stability, Financial Services and Capital Markets Union Submitted electronically RE: Prospectus Directive Review An Investor Perspective Dear Sirs, BlackRock is pleased to have the opportunity to respond to the European Commission s review of the Prospectus Directive (PD). BlackRock is a leading provider of asset management, risk management, and investment advisory services to institutional, intermediary, and individual clients worldwide. As of 31 March 2015, the assets BlackRock manages on behalf of its clients totalled 4.40 trillion across equity, fixed income, cash management, alternative investment and multi-investment and advisory strategies including the ishares exchange traded funds. BlackRock represents the interests of its clients by acting in every case as their agent. It is from this perspective that we engage on all matters of public policy. BlackRock supports policy changes and regulatory reform globally where it increases transparency, protects investors, facilitates responsible growth of capital markets and, based on thorough cost-benefit analysis, preserves consumer choice. In our view, the disclosure of meaningful information to investors is of paramount importance, and underpins the two key objectives of the PD: investor protection and market efficiency. To this end, BlackRock believes that the principle of requiring a complete and comprehensible prospectus when securities are admitted to trading on a regulated market, or offered to the public for the first time, is both necessary and important. However, the PD Review provides an opportunity to re-assess the legislation with a view to more appropriately balancing cost, detail and meaningfulness of disclosure in other circumstances to better facilitate the flow of capital from end-investors to European companies. Our recommendations for rebalancing the cost and information value of the prospectus include: Increasing efficiency of prospectus issuance 1. Address the overlap of disclosure requirements by removing the requirement for a PD summary where a PRIIPs KID is already required. 2. Exempt non-listed AIFs and other closed-ended funds such as ELTIFs, EuVECAs and EuSEFs subject to product specific Regulation from the requirement to issue PDcompliant prospectuses and allow them to rely on the disclosure requirements in the AIFMD and other product specific Regulations. 3. Require publication of only material updates of the prospectus on an annual basis. 4. Remove outdated requirement to provide printed prospectuses. Increasing comprehensibility 5. Re-introduce flexibility to the PD prospectus summary format and content. Managing prospectus length 6. Adjust current requirement from include all information to include all relevant information. 7. Allow use of incorporation by reference. We set out more details on how these recommendations could be achieved in the Annex to this document. 1
BlackRock is supportive of the intent behind the European Commission s review of the PD, and we appreciate the opportunity to comment. We welcome further discussion on any of the points we have raised. BlackRock is registered on the Interest Representative Register under ID 51436554494-18. Sincerely Joanna Cound Managing Director Public Policy joanna.cound@blackrock.com +44 207 743 5579 Gareth Juul Managing Director Legal gareth.juul@blackrock.com +44 207 743 3638 2
Annex Detailed recommendations Taking the PD Review as an opportunity to re-assess the balance of cost, detail and meaningfulness of disclosure, we highlight the following points for consideration: Prospectus requirements lock-up capital in the system The issuance of lengthy prospectuses locks-up capital in legal fees and other related costs capital that could be more productively deployed elsewhere. This frictional cost of raising capital can increase the hurdle rate of return of a project or company initiatives. Likewise, the practice of re-issuing full PD prospectuses (with full legal review) every 12 months where there are no fundamental changes to the initial disclosure ties up companies capital in additional legal costs. The Capital Markets Union (CMU) project provides the political opportunity to address these barriers to greater use of Europe s capital markets by companies. Prospectuses provide important information to facilitate institutional investors due diligence process, particularly in the case of primary issuance Although prospectuses are currently required for both primary and secondary issuance, in our view they are of most value to institutional investors for primary issuance, particularly those looking to finance SMEs through, for example, Initial Public Offerings (IPOs). To appreciate the role PD prospectuses play in the investment due diligence process, it is worth noting a number of principles that underpin an institutional investors decision to invest in an IPO. An institutional investor considering investing in an IPO will use both the PD prospectus and additional sources of information to look for evidence of: Good governance standards and balance sheet structures Experienced, fully committed management, free from conflicts of interest Prudent accounting, sensible revenue recognition and operating profits consistently turned into cash Attractive valuation relative to peer group of companies Incentive fees that align with longer-term share prices In the case of structured finance transactions, such as securitisations and project finance, the PD prospectus forms a particularly important part of the investment process for institutional investors. For structured finance transaction issued by special purpose entities, the prospectus and associated data disclosures are the only source of information for investors when a transaction is first issued. Since the financial crisis, the securitisation market has however established guidelines for ensuring sufficient disclosure. Consequently, we do not believe further intervention at the EU level for all these types of issuance is warranted, except in terms of our general points on improving comprehensibility set out below. Review the need for PD prospectuses on secondary issuance Prospectuses are of less value to investors interested in investing in secondary issuances, especially where there are other sources of data on the available company. This presents considerable opportunities to reduce costs by minimising prospectus issuance for secondary offerings. BlackRock is therefore supportive of the European Commission s intent to alleviate PD prospectus requirements for secondary issuance beyond the current rules of proportional disclosure only for rights issues. This could be achieved by targeted incorporation of any material changes by reference to disclosure on the issuer s website. Increasing efficiency of prospectus issuance Multiple overlapping disclosure documents are confusing to investors, lead to multiple layers of liability (e.g. on both the broker and the management company in the case of a closed-ended 3
fund) and are costly to produce. This can be further exacerbated by differing national interpretations of when a prospectus is required, We recommend that non-listed AIFs and ELTIFs and EuVECAs, EuSEFs are exempted from the requirements to produce a PD-compliant prospectus given the extensive investor disclosure requirements that these fund types are subject to. We also recommend a concerted effort to reduce the additional listing requirements for listed AIFs and ELTIFs taking into account the governance and product rules (in the case of an ELTIF) that apply to these funds. Revisions to the PD should also reflect the introduction of key information documents for Packaged Retail and Insurance-based Investment Products (PRIIPs). The overlap of disclosure documents could be minimised by removing the requirement to issue a PD summary for retail investors where the PRIIPs KID would cover this. We therefore recommend limiting the production of the PD summary to those circumstances where a PRIIPs KID is not required (mainly listed shares and bonds not subject to an existing PD exemption). While we believe the commitment to transparency must last for the full life of an investment, reissuing entire prospectuses (with full legal review) is costly and adds little value per se. We feel the objective of information disclosure could be more efficiently served by highlighting links in the prospectus, which direct investors to specific pages on the issuer s website where material changes can be found, using an incorporation by reference approach on an annual basis; and so allowing the original prospectus to remain valid for a fixed period of time before renewal, e.g. five years. In our view, the attempts to harmonise the quantitative thresholds for issuers and creation of a level-playing field for admission of trading of securities on MTFs will bring about broad benefits, aligned to CMU s objective of increasing funding opportunities for the real economy via the capital markets. PD prospectuses and other disclosure documents should be freely available to current and prospective investors on an ongoing basis, however, the current requirement to provide printed prospectuses on request is outdated. Electronic publishing is sufficient and offers the ability to provide documents in a durable medium such as a searchable PDF. Electronic publication and investor access may further be served by a central repository, however this is not essential if the information is available elsewhere e.g. issuer websites. Increasing comprehensibility, especially for retail investors The objective of the PD summary prospectus is to increase comprehensibility by presenting information in a simplified, comparable format. The current PD summary is useful, but legal jargon should be further reduced and, where it does exist, simplified. Clear information is in the interest of both the issuer and the investor - clarity is more important than prescribed format. In our view, the introduction of rules intended to make the PD summary more standardised and comparable has fallen some way short of its aim, and would benefit from review. The clear presentation of relevant investment information is of particular importance for retail investors. The PD summary document can provide more focused and therefore more helpful for retail investors than the full prospectus. The full PD prospectuses do serve an information disclosure purpose - the information needs to be captured and published somewhere but an overly lengthy document risks remaining unread by retail investors, therefore losing its value in protecting investors. For issues not covered by a PRIIPs KID, we therefore favour a move away from prescriptive rules in relation to the production of the PD summary, to a re-introduction of greater flexibility in format and content, guided by clear disclosure principles. This should help better fulfil the PD summary s dual function as both a marketing document and an investor protection tool and will reflect the very many different type of issuers. For both issuers and investors, the quality of the disclosure is more important than conforming to a specific template. 4
Managing prospectus length We agree with the European Commission s assessment that prospectuses have become overly long, impeding their effectiveness from an investor protection perspective. However, long form disclosure is still relevant - the information needs to be captured and published somewhere. Furthermore, it is sometimes difficult to ascertain which information is the most relevant given the onus is on the issuer to define what represents a material risk, and how much information to provide. The current requirement for the issuer to include all information necessary to enable investors to make an informed decision could however be adjusted, to free issuers from overly conservative interpretations of the requirement, and present primarily relevant information i.e. specific risk factors that may impede ability to return capital. While shorter, more concise disclosure documents are preferable where they continue to suit the information purpose, we are not in favour of imposing a length limit on the prospectus. An imposed limit could have implications for the issuer, who is liable for omissions of information, and is not a criteria likely to improve clarity. Adjusting the requirements to include only risks that are likely to impact the return of capital, and the use of incorporation by reference the inclusion of further relevant sources of information by reference to them may be more appropriate tools for reducing unnecessary length. 5