This article first appeared in Company Secretary’s Review in May 2015
HM Treasury and the Financial Conduct Authority (FCA) have published a joint consultation paper (CP15/11)(1) on proposed amendments to the Disclosure and Transparency Rules (DTRs) and the Financial Services and Markets Act 2000 (FSMA) which are required in order to implement the Transparency Directive Amending Directive ((2013/50/EU) (TDAD). The FCA is also proposing some other changes to the DTRs, relating to stock lending and investment managers. The submission deadline for responses is 20 May 2015.
Following a European Commission Review of the Transparency Directive, the TDAD came into force on 26 November 2013. Member States have 24 months from that date to implement the TDAD.
The UK has opted for early implementation of two aspects, namely the new requirement for companies in certain sectors to report on payments to governments (new DTR4.3A) and the removal of the requirement to publish interim management statements (old DTR4.3).
Most of the remaining changes will be implemented by amendments to the DTRs, for which the FCA is responsible. Some amendments to FSMA with regard to sanctions powers are also required: HM Treasury is responsible for this.
Financial instruments with a similar economic effect
The UK disclosure and transparency regime has hitherto been more stringent than the Transparency Directive, in that since 2009 it has required disclosure of contracts for differences and other financial instruments with a similar economic effect to qualifying financial instruments. The TDAD has now introduced this requirement at EU level. Although the UK regime will not be greatly altered, the key difference is that the TDAD does not provide for a stand-alone exemption from the disclosure requirements for client-serving intermediaries. Therefore, financial instruments with similar economic effect held in a client-serving capacity will need to be aggregated with the holder’s position in other financial instruments of the same issuer. The FCA proposes to delete the DTRs which currently provide for the exemption from notification by client-serving intermediaries (DTR5.3.1R(2), (3), (4) and (5)). Instead it will incorporate into DTR5.3 the text of the relevant regulatory technical standard published by the European Securities and Markets Association (ESMA).
Before financial instruments with similar economic effect fell within the scope of the Transparency Directive, the FCA set out certain rules and guidance to assist with the UK super-equivalent regime, including certain exemptions from that regime. The FCA states that on the basis that these instruments are now included in the revised Transparency Directive, it proposes to remove the provisions and guidance which were specifically included for the UK’s super-equivalent regime. These include DTR5.3.1R(2A), which sets out the types of interest which the FCA regarded as being outside the scope of the UK contracts for differences regime. These include nil paid rights received during a rights issue, and rights to apply for open offer shares. They also include DTR5.3.3G(2), which sets out the FCA’s view of what a financial instrument with similar economic effect to a qualifying financial instrument looks like in practical terms. These provisions are being replaced by the new regulatory technical standard text which will be reproduced in a new DTR5.3.3B.
There are also proposed changes to the requirements on aggregation and notification of holdings, including a new notification requirement in DTR5.3.5R to reflect the revised Transparency Directive.
The FCA anticipates an increase in the amount of notifications received from client-serving intermediaries as a result of removing the stand-alone exemption and acknowledges that there will be additional costs to firms acting in this capacity. However, as these firms will already have monitoring systems in place, the FCA expects the costs to be marginal.
Publication and availability of financial reports
The TDAD extends the deadline to publish half-yearly financial reports from two months to three months after the end of the period to which the report relates. DTR4.2.2R(2) will be amended to reflect this change. Issuers will have to keep annual financial reports and half-yearly financial reports publicly available for ten years, rather than five years as at present. DTR4.1.4R and DTR4.2.2R(3) will be amended to implement this change. The FCA intends to apply the new rules only to reports published on or after the date the new rules come into force, but has asked for comments on this approach.
Changes to rules on home Member State
The TDAD has changed the rules on choice of home Member State so that it will no longer be possible for an issuer to fail to declare a home Member State. This change will be implemented by an amendment to DTR6.4.2R to require an issuer whose home Member State is the UK, or who chooses the UK as its home Member State, to disclose that in accordance with DTR6.2 and DTR6.3. There will also be a new DTR6.4.3R requiring an issuer to disclose its home Member State. The definitions of “Home State” and “Host State” will also be updated in the Glossary section of the FCA Handbook to reflect the revised definition of home Member State in the Transparency Directive.
The TDAD creates a new exemption from the vote holder notification obligations for voting rights attached to shares that have been acquired for stabilisation purposes. This will be reflected in a new DTR5.1.3R(7).
Changes to the definition of an “issuer”
The TDAD amends the definition of “issuer” and clarifies the treatment of non-listed securities represented by depositary receipts. The Glossary definitions of “issuer” and “shareholder” will be amended to implement these changes.
Draft amendments to constitution
The TDAD removes the requirement for issuers to communicate draft amendments to their constitutions to the competent authority and the market, because this is covered by the Shareholders’ Rights Directive. The FCA will therefore delete DTR6.1.2R which required issuers to communicate draft amendments to the FCA and the market.
HM Treasury is proposing amendments to FSMA to implement the sanctions provisions of the TDAD. It was an objective of the TDAD to create a minimum standard for the sanctions regimes that Member States must have in place for breaches of transparency rules. One of the requirements of the TDAD is that competent authorities should be able to impose “an order requiring the natural person or the legal entity responsible to cease the conduct constituting the breach and to desist from any repetition of that conduct”. HM Treasury proposes that the FCA use the existing court-based procedure of section 380 of FSMA to meet this requirement. This power enables the FCA to seek an order from the court in the event of a person breaching a “relevant requirement”. This order will require the person to remedy the breach.
However, there are areas in which FSMA will have to be amended to accommodate the requirements of the TDAD. In particular, Article 28 of the amended Transparency Directive requires that sanctions can be applied to “the members of administrative, management or supervisory bodies of the legal entity concerned”. Section 91(2) of FSMA currently states that “directors knowingly concerned with a contravention” can be sanctioned for such breaches. FSMA will therefore need to be amended to ensure that all those referred to in Article 28 can be sanctioned, including members of entities which are not bodies corporate.
New Article 28b(2) of the amended Transparency Directive requires Member States to provide for the possibility of suspension of voting rights. HM Treasury is proposing an amendment to Part 6 of FSMA giving the FCA power to apply to the courts for a suspension. It is proposed that this power should apply only to the most serious breaches.
Other DTR changes (not arising from the TDAD)
The FCA is proposing to amend DTR 5 to require borrowers and lenders under a stock lending contract to disclose their respective transactions at the 5%, 10% and higher thresholds required by the Transparency Directive. This follows ESMA guidance published in 2014 suggesting that stock lending transactions should be included in the disclosure requirements.
Investment managers – the FCA is proposing to amend DTR5.1.5R to make it clear that all investment managers may make voteholder notifications at the 5%, 10% and higher European Union (EU) minimum thresholds, rather than at the UK super-equivalent thresholds of 3% and every 1% thereafter.
Other TDAD modification
The consultation paper also notes some TDAD modifications which may impact on the current regime but do not at this time require new or amended DTRs. In addition to the amendment to the FSMA outlined above, they include proposals for:
As noted above, comments are requested by 20 May 2015. HM Treasury and the FCA intend to publish their feedback toward the end of 2015.
(1) Implementation of the Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule and Transparency Rule Changes CP15/11 (March 2015) available from the FCA website.