August 2010 European Commission Public Consultation on the Modernisation 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 (Transparency Directive) Reply from NASDAQ OMX The NASDAQ OMX Group, Inc. delivers trading, exchange technology, listings and other public company services and post-trading services across six continents. It lists approximately 3,700 companies from 50 countries and from all industry sectors. NASDAQ OMX offers various capital raising and trading solutions to companies around the globe, including its U.S. listings market, NASDAQ OMX Nordic, NASDAQ OMX Baltic, First North, U.S. 144A, NordPool and N2EX. NASDAQ OMX Nordic and Baltic include exchanges in Helsinki, Copenhagen, Stockholm, Iceland, Tallinn, Riga and Vilnius. NASDAQ OMX offers trading across multiple asset classes including equities, derivatives, debt, commodities, structured products and ETFs. NASDAQ OMX also offers posttrading services in the form of central counterparty derivatives clearing. NASDAQ OMX Group technology supports the operations of about 70 exchanges, clearing organizations and central securities depositories in more than 50 countries. Information about the respondent Name of respondent organisation/company/natural person: NASDAQ OMX Contact person and function: Elina Yrgård, Legal Counsel, EU Affairs Country: Sweden
Field of activity of respondent (e.g. issuer of securities, investor, financial intermediary, financial analyst, national authority, other): Market operator (regulated market, MTF) NASDAQ OMX appreciates the opportunity to provide comments in the process of the review of the Transparency Directive (TD). Please find below a summary of the most important points and then answers to the specific questions in the consultation document. Summary We encourage the striving for more harmonization and especially the proposal for maximum harmonization of the rules on notification of major holdings of voting rights. This will support a realization of the EU single rule book. The Commission s study of the implementation of the TD has revealed a fragmented picture as regards national implementation and application. The most efficient way to address this obstacle for crossborder activities is maximum harmonization. We urge the Commission to facilitate the use of English for issuers information disclosure. The language regime in the TD should allow issuers to opt for only English and no translation to/from a local language. This will reduce the translation costs and will improve the allocation of investments across borders, benefiting investors as well as, importantly for the purpose of supporting SME growth, the access to capital for issuers. We hesitate on the need to introduce a specific regulatory layer for smaller issuers listed on a regulated market. A few reductions in the regulatory burden will not bring benefits significant enough to balance the potential negative impacts of regulatory fragmentation. The needs for smaller issuers are catered for with the alternative listing venues, such as First North operated by NASDAQ OMX. These alternative venues should be maintained as regulated by its operators in order to provide access to finance in the way that suits issuers the best. In case the Commission anyway decides to move forward with introducing a specific regulatory layer for smaller issuers listed on a regulated market, it is absolutely crucial that there will be one single definition for smaller issuer across the EU. The promotion of growth must be accomplished equally for all smaller issuers in the EU. Relating the categorization of one specific issuer only to the size of other issuers in its home Member State does not provide a fair competitive situation in an international perspective. We also encourage the Commission to ensure sufficient coordination with other relevant work streams, such as importantly the ongoing review of the Market Abuse Directive. 2(13)
I. Attractiveness of regulated capital markets for small listed companies Introductory comment NASDAQ OMX: We believe regulated markets are attractive to smaller issuers. This is clear from the steady flow of companies switching from the alternative listing venue to the main market. In the Nordics we operate the alternative listing venue First North, licensed as an MTF. The listing rules are not regulated by national legislation. Instead First North is regulated by the First North Rule Book, where the rules are developed by NASDAQ OMX in cooperation with the issuers in order to tailor the listing offering to the needs of the issuers. This also entails a differentiation in terms of segment. The most important feature to mention in this context is the Premier segment. The Premier segment rule book is tailored for issuers aiming to switch to the main market, the regulated market. The Premier rules are close to the main market rule book, i.e. they are more stringent than for other segments on First North. Issuers that select the Premier segment for instance comply with IFRS. Issuers can select the Premier segment as a preparatory step before switching to the main market. The Premiere segment was introduced responding to the demands of the issuers. The above description underlines that the regulated market is attractive also to small issuers. We clearly see the importance of the alternative markets functioning as a step on the way to a listing on the regulated market. We do see a steady flow of issuers switching from First North to the regulated market and it is especially interesting to note that this observation held true also during the financial crisis. We welcome that the Commission is not proposing to extend the rules of TD to the alternative markets. We believe the issuer obligations on alternative markets are best regulated by the market operators rather than by EU or national legislation. Please also note that MTF rule books will always contain rules on disclosure obligations for issuers, as this is a fundamental prerequisite for organized trading. We encourage the Commission to seek further convergence in this sense with the review of the Market Abuse Directive. Furthermore, against the above background, we question the need for introducing a separate regulatory layer for smaller issuers listed on regulated markets. The alternative markets, such as First North but also others in place across Europe, already cater for the needs of smaller issuers. Introducing another regulatory layer for some of the issuers listed on the regulated market will create a fragmented picture and risks reducing the integrity sought for on the regulated markets. Investors will have a more complicated picture as a basis for investment decisions. At the same time we do not see that the room for reductions in the regulatory burden for the issuers is very significant. In several contexts, such as most relevantly the open hearing organized by the Commission in relation to this consultation, it was clear that the ideas for reducing the regulatory burden put forward by the Commission were not considered important by issuers. This must be taken into account by the 3(13)
Commission going forward. There is a risk that the benefits will not outweigh the negative impacts. Finally, we wish to underline the importance of ensuring as much harmonization as possible. The implementation and the application of the TD seem to be fragmented, which is perceived as an obstacle for cross-border activities. This is equally important for the rules already in place as well as any new rules. Maximum harmonization should be aimed for and ESMA should be given an important role in ensuring the realization of the EU single rule book. The issue: attractiveness of regulated markets for small listed companies and the TD 1. Impact of the TD on the attractiveness of regulated markets for small listed companies. Do the TD obligations for issuers (e.g. disclosure of annual and half-yearly financial reports, quarterly information etc.) impact on the decisions of small listed companies to be listed in or to exit regulated markets (e.g. do they act as an entry barrier)? NASDAQ OMX: Not all companies are willing to undertake all the obligations of the TD. This is why the alternative markets play an important role in providing an alternative listing venue for those companies that decide to not utilize the benefits of the main market, but still wish to use the securities markets to access finance. On the other hand, as described above regarding the role of the alternative markets, we also see that it is natural for many issuers to approach a listing on a regulated market step by step, via an initial listing on an alternative market. A listing on an alternative market allows the issuer to adapt to the requirements of the regulated market in the pace that suits this issuer. This process may possibly include the step of moving to the First North Premier segment, as described above. After being listed for some time at the alternative market, the step to a main market listing is no longer very complex. In this sense the TD does not act as an entry barrier. 2. Costs for smaller listed companies. Which are the most important costs for small listed companies associated to compliance with the TD (e.g. cost of preparing the accounts, auditing costs, legal costs, cost of making public the information etc.)? NASDAQ OMX: A combination of costs. Translation costs are one (see the answer to Q 10 below). IFRS and accompanying auditing costs are also perceived as significant. The general regulatory requirements entails increased legal costs for compliance purposes. 3. Potential diminution of cost for small listed companies. What changes of the TD will bring important reductions in costs for small listed companies? NASDAQ OMX: As already stated, we do not see a major need to change the TD by reducing the regulatory burden specifically for smaller issuers, thereby introducing a separate regulatory layer for the regulated market. It is our observation from the markets 4(13)
we operate that the alternative markets already provide the listing offer with lower regulatory requirements. We also believe that other initiatives to simplify the regulatory burden, such as in the review of the Prospectus Directive, serve the purpose of reducing costs for all issuers, but indeed the greatest effect will be perceived for smaller issuers. Should the Commission move forward with adjusting the TD specifically for smaller issuers, we note that IFRS compliance seems to cause costs for smaller issuers and could be another related potential area to look at. 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? NASDAQ OMX: On the main market the issuers are more broadly eligible for inclusion in indices and for investments by UCITS and institutional investors. This provides access to a broader investor base which indeed supports better analyst coverage and better liquidity. 5. Other cases reflecting low benefits. Are there, in your view, other cases reflecting low benefits for small listed companies resulting from disclosure obligations compared to larger listed companies? NASDAQ OMX: Please see Q 4 above. Possible options to address in the TD 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? - i) for issuers of shares, those companies with a market capitalisation below a certain threshold such as 100 Million, 250 Million or other; - 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; - 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; - iv) for issuers of debt securities only, those companies having outstanding debt securities below a certain threshold; - v) for issuers of debt securities only, those companies having a turnover below a certain threshold: - vi) other. NASDAQ OMX: As already stated, we question the need for a specific regulatory layer for smaller issuers, and so we see no need for a specific definition for a small listed 5(13)
company. Should nevertheless the Commission move forward with introducing a definition, we have these views. For issuers of shares, we strongly support option i). An EU definition must refer to one EU threshold, in order to support a level playing field for SMEs across the EU. Smaller issuers should not be defined by a dynamic threshold related to the average market capitalization of the home Member State. This would have the result that a company too big to be defined as small in a smaller MS, would be significantly smaller than the largest small issuer in a larger MS. But still, the small issuer in the larger MS would fall within the scope of the lighter regime, thus benefiting from accessing capital more easily and reducing its listing costs, while the non- small issuer in the smaller country would not be eligible for these benefits, albeit its even smaller size. This could not be the intended effect. Also, a dynamic threshold would not provide investors with a harmonised picture. The single market needs to instead be supported by one reference to one threshold, providing one single definition rather than 27, and thus facilitating access to capital for all small issuers across European borders. For issuers of debt securities, as the intention is to reduce costs for small issuers with limited resources, it seems more relevant to relate a possible definition of smaller issuers to the size of the issuer itself than to the size of the outstanding debt securities. Hence, the option v) seems more relevant, related to either the turnover as suggested, or possibly even more relevantly to the balance sheet. One single EU definition is equally important for issuers of debt instruments as for issuers of shares. 7. Potential diminution of cost for small listed companies if changes to the TD were to be adopted 7.1. If a differentiated regime for small listed companies is added to the TD 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? NASDAQ OMX: In case the Commission moves forward with the outline for a specific regulatory layer for smaller issuers, these are our views: Member States should be prevented from imposing more stringent or additional rules in national laws, but the market operators on the other hand need to be allowed to do so. As already explained above, alternative markets may offer several segments, such as the First North Premier segment and the Small/Mid/Large Cap segments on the NASDAQ OMX Nordic main market. Denying the market operators this opportunity to tailor the listing service to the needs of the issuers would be to deny the smaller issuers their first choice in accessing capital. It would be counterproductive. Please also refer back to the introductory comments to this section I. 7.2. 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? 6(13)
NASDAQ OMX: It could imply reduced costs but it would probably not be significant. 7.3. 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)? NASDAQ OMX: It seems that what implies cost is the step to find out what each requirement means, how much text is required, what content, how detailed, etc. 7.4. Would you see benefits from integrating in the TD the disclosure obligations mentioned in question (8.3) which are currently in different directives? NASDAQ OMX: It may bring some benefits in terms of clarity, but it must be recognized that such technical changes will not bring any material effects and the perceived improvement may be limited. 7.5. If the TD provided for maximum harmonisation (no national add-ons) of the content of narrative reports referred to in question (7.3) for small listed companies, would this imply a reduction in legal, auditing or other type of costs? NASDAQ OMX: It could possibly reduce the costs. But for those issuers that see a benefit in providing more information than as required as a maximum, this should be allowed. The information to be included in such reports must be tailored to the specific circumstances of the issuer. It does not seem appropriate to limit an issuer s opportunity to disclose information as it deems to be useful. By such limitations the issuer would be denied its first choice in how to best access capital. 7.6. In case you think maximum harmonisation regarding the content of narrative reports referred to in question (7.5) is desirable, what do you think would be the best way? -i) non-mandatory ready-to-use templates regarding these narrative disclosures (which could be prepared for instance by CESR/ESMA); -ii) more detailed rules in European law, either in the TD or in delegated acts adopted by the Commission; -iii) a combination of both NASDAQ OMX: Please see the answer to Q 7.5 above. 7.7. Concerning question (7.6), could you provide a specific reply regarding the disclosure of environmental and social data requested in Article 46(1)(b) of the Fourth Company Law? NASDAQ OMX: Please see the answer to Q 7.5 above. We do not necessarily see benefits in adding detailed rules on the obligation to disclose environmental and social data. 7(13)
8. Diminution of cost for small listed companies vs. diminution of transparency to the market. 8.1. Is it possible to apply lighter transparency obligations for small listed companies without a corresponding significant diminution of transparency provided to the market? NASDAQ OMX: We see a clear risk in reducing the transparency on the regulated markets. Regulated markets provide the highest regulatory level and market integrity available. Investors need to remain confident that regulated markets deliver on this. A reduction in the regulatory quality risks deteriorating the market to the detriment of all, while not delivering significant benefits for smaller issuers. For each piece of information that is considered for a reduction of transparency, it is important to take the investor perspective. If investors consider this piece of information valuable in making investment decisions, it should remain. 8.2. If the obligation to disclose quarterly financial information8 was waived for small listed companies, would this result in an unreasonable diminution of transparency? NASDAQ OMX: We believe that the quarterly reports provide useful information to the market and that such frequent information disclosures support efficient price formation. We also note that although quarterly reports are not mandatory on the alternative market First North, many issuers disclose quarterly reports anyway. On the other hand, we are also aware that many (potential) issuers may believe that the cost of preparing quarterly reports do not match the benefits. In case quarterly reports should not be mandated, we underline the importance of the markets being allowed to maintain such a requirement, not least for the purpose of segmentation, and also for issuers to disclose quarterly reports voluntarily. 9. Addressing the lower visibility of smaller listed companies 9.1. Do you think that measures at EU level (including possible changes to the TD) can help solving the lower visibility of smaller listed companies? -(i) Yes (see next question) -(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. NASDAQ OMX: As regards the idea to create a pan-european trading platform for trading in smaller issuers that has been put forward 1, we do not believe in it. There are however other measures that could lead to better visibility and access to capital across borders for smaller issuers, the most important one being an opportunity to disclose information in English only when this is appropriate (see the answer to Q 10 below). 9.2. What type of measures at EU level could help solving the visibility problem of small listed companies? 1 http://www.mazars.com/content/download/37683/867875/version/2/file/sba-smiles-english.pdf 8(13)
-i) The TD should contain differentiated rules for small listed companies regarding timing and/or methods for the disclosure and dissemination of information; -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 -iii) financial analysts and intermediaries should get incentives to interest themselves in small listed companies; -iv) other. NASDAQ OMX: One important measure that could help solving the visibility problem would be an opportunity to disclose information in English only when this is appropriate (see the answer to Q 10 below). Another measure would be to introduce broader opportunities for investments in smaller issuers. UCITS funds are only allowed to invest a very small portion in issuers listed on the alternative markets. A new fund type could be introduced at EU level, allowing a larger portion of investments in the smaller issuers listed outside the regulated markets. This would draw the attention of investors to these smaller issuers, thus increasing visibility. This comment may be closest to alternative iii). 9.3. 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? NASDAQ OMX: Such a database may be useful. It is however important that the development of a database does not impose additional costs for the issuers as this will not encourage especially smaller issuers to list. It is also a precondition that the users of the database can understand the information. This means that the language regime of the TD must allow issuers to produce information in English only. If there is a requirement to produce information also in a local language, this adds translation costs, which has the most negative effect for the smaller issuers. The TD should allow (but not require) issuers to produce regulated information in English only. Please also see the answer to Q 10 below. Other views regarding small listed companies. 10. Do you have any other views on regular transparency requirements which could make regulated markets more attractive to small listed companies? NASDAQ OMX: In our opinion the information disclosure rules for companies listed on regulated markets are comprehensive. There are types of information for which there are no, or less detailed, rules. One example is corporate governance. Although we believe that no more mandatory rules need to be 9(13)
added in the form of EU directives on corporate governance, we do see a benefit in developing codes. This is already being handled in several industry initiatives, such as by EuropeanIssuers and EVCA. We mention this to underline that we do not see a need for legislative initiatives in this regard. One specific rule in the TD is worth mentioning: Article 20 on language regimes should be adjusted. On the alternative markets, there is no EU language regime requiring the issuer to disclose information in one or several languages accepted by the competent authority. Instead, the market venue s rule book may allow the issuer to use only English. This is a benefit for those issuers that wish to access finance on a broader scale than only the home market. Once the same issuer decides to switch to the main market, article 20 applies and the issuer normally has to disclose information also in the language of the home market, which for most issuers in Europe is not English. This adds a translation cost for the issuer and acts as an entry barrier to the main market. It can be noted that the Commission s study of the implementation of the TD revealed that across all Member States, 50% of the users of information perceive the lack of information available in English as an obstacle for investment decisions. This is evidence that there is a strong demand from investors to access information in English. In addition, the plans to develop the national OAMs into a European network in order to improve pan- European access to issuer information, will not make sense unless the information may be disclosed in English. If national law/regulators may require information to be produced in a local language also, the translation cost risks becoming a burden resulting in less information being produced in English. The language regime of the TD should be much more liberal and should allow (but not require) the listing venue to allow disclosures in English only when this is appropriate, duly taking into account investor protection aspects. II. Information about holdings of voting rights. General comment: NASDAQ OMX: Under this section, we will not answer each question but instead give a few general comments. The most important message is the need to achieve as much harmonization as possible. This applies to any new rules to be introduces as well as to rules already existing in the TD. The study of the implementation of the TD has revealed that the lacking harmonization is perceived as an obstacle to cross-border activities. We believe that the implementation and application of the rules on information about major holdings of voting rights are specifically perceived as fragmented. This needs to be addressed. We support moving forward with extending the major shareholding reporting regime of the TD to cash settled derivatives. This would enhance transparency on the build-up of 10(13)
positions. The already existing rules on thresholds, aggregation, exemption and disclosure should apply to all instruments included under the regime, in order to provide a true picture. 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? NASDAQ OMX: Yes. Maximum harmonization would have the important benefit of simplifying cross-border investments, thus facilitating the access to capital across borders for issuers. Shareholders that are active across borders today face different regimes for major shareholdings in Member States. There may be differences in how the information shall be disclosed and disseminated and in practice the scope of instruments subject to reporting and the calculation of holdings may vary. Maximum harmonization would be an important step towards realizing the EU single rule book. 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 TD regarding the notification of major holdings of voting rights? NASDAQ OMX: Yes. Please see the answer to Q 19 above. Uniform EU Regime or maximum harmonisation: disclosure by issuers. 21. Would it be desirable to set up a uniform EU regime (e.g. by a directly applicable EU Regulation) regarding issuers' disclosures? NASDAQ OMX: We do not currently see a need for further harmonization as regards the actual method of issuers disclosures. Divergent rules: calculation of holdings. 22. Could you please explain in what way national rules implementing the Directive result in different methods for aggregating holdings of voting rights (and where applicable financial instruments) for the purposes of calculating whether the relevant thresholds triggering the notification obligation are reached or crossed by investors? 11(13)
NASDAQ OMX: It seems that the type of derivative that is considered to be captured by the rules may be applied in different ways in practice as well as the calculation of thresholds and deadlines. ESMA should play an important role in harmonizing the application of the TD. Unclear rules 23. Could you provide evidence of cases where unclear rules in the Directive ought to be clarified? NASDAQ OMX: - IV. Any other comments 24. Do you have any other comments regarding the TD? NASDAQ OMX: We wish to mention one aspect on information disclosure that seems relevant for the review of the Transparency Directive. It concerns a particular situation in derivatives markets: dividends payments, dates and general policy, which in derivatives markets can constitute inside information. This was reflected in CESR s second set of guidance and information on the common operation of the Market Abuse Directive http://www.cesr-eu.org/popup2.php?id=4683. This guidance was intended for the CESR members to apply this in their day-to-day regulatory practices on a voluntary basis. In addition to the CESR guidelines, the need for a timely, exhaustive and harmonised disclosure on dividends by listed companies is also one of the main purposes of current industry initiatives. This was reflected in the Market Standards for Corporate Actions finalised in May 2009 by the Corporate Actions Joint Working Group 2. Despite these efforts and although CESR has signalled the potential for dividends policy to constitute inside information, current market practice is still of concern and could have a negative effect on market participants, which should not be unduly impacted by unforeseen changes in dividend policy. To address this issue, it would be useful to provide solutions towards the way dividend information is given by the issuers to the markets. Many companies have not adopted a clear dividend policy that is in line with international corporate governance standards. It appears that some issuers underestimate the impact of 2 The Group s objective has been to develop a comprehensive set of market standards for the operational processing of all categories of corporate actions, including distributions such as dividends. This work is aimed at solving the current situation characterized by the variety of rules, information requirements and deadlines for corporate actions. Standardizing these processes across all European markets, and possibly beyond, aims at achieving a significant reduction of respective costs and operational risks. In particular on dividends payment, the document makes clear the proposal sequences of dates for cash distributions, specifying the minimum business days for the announcements of the dividend payment by the issuer and the ex date. The document produced by the Working Group is available at: http://www.europeanissuers.eu/_lib/newsflash/cajwg%20standards%20version%20for%20endorsement%208may09.d oc.pdf 12(13)
changes in their dividend policy on positions (in cash and derivatives) held by the investors in their companies. We would advocate that the future ESMA could recommend or require issuers, whose shares and derivatives are listed in the regulated markets or constituents of main indices, to follow some basic rules regarding disclosure of dividend information as described below. This could be done in the context of the review of the Transparency Directive. Proposal for rules regarding disclosure of dividend information 1. Every issuer should make a declaration of a pattern/schedule of ex-dividend dates to stick to it every year. The pattern/schedule should include month and date of payment for all the ordinary payments the company may make. The date does not need to be exact, it will be sufficient that the issuer commit that the payment will be always made the day after the expiration of the derivative contracts (usually on the third Friday of any particular month). 2. Amounts of the dividends should be confirmed timely, whether as a proposal to the Annual General Meeting or as a firm decision. 3. Issuers should avoid unjustified changes to the declared dates, and, if a change is unavoidable, explain the reason for it. 4. Issuers should avoid unjustified delays in releasing any information regarding the payment of dividends. 5. Any major change in the date pattern, like changing from half-yearly to quarterly payments, should be announced a long time before its implementation. 6. Every payment should be identified by the issuer as ordinary or as special. 13(13)