This document is an excerpt from the EUR-Lex website
Document 52011SC1280
COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT /* SEC/2011/1280 final */
1.
Introduction
The Transparency Directive[1]
(“the Directive”) requires issuers of securities traded on regulated markets
within the European Union (“EU”) to ensure appropriate transparency for
investors through the disclosure and dissemination of regulated information[2]
to the public. Five years after the entry into force of
the Directive, the Commission published a Report[3] assessing the
impact of the Directive. The Report recognised the Directive as useful for the
proper and efficient functioning of the market, however it highlighted areas
for improvement. In 2010, the Commission launched a public
consultation on the modernisation of the Directive. The main issues raised
were: the attractiveness of the regulated markets for small and medium - sized
issuers “SMIs” and ways to improve the regime for major holdings of voting
rights. The respondents to the public consultation
varied in their views as to whether the situation of SMIs could be improved
through changes to the Directive. Concerning holdings of voting rights, the
public consultation demonstrated general agreement on the need to include a
requirement to notify holdings of cash-settled derivatives[4]
and to increase the level of harmonisation in this area. In addition, calls
were made for greater clarity in certain technical areas. Finally, in 2010, the Commission agreed
with the European Parliament to evaluate the feasibility of requesting certain
companies to disclose key financial information regarding their activities in
third countries[5]. A separate impact assessment on this issue concluded that the
Transparency Directive and the Accounting Directives[6] should be modified to include a
new requirement in this respect.
2.
Problem definition
The problems identified with the existing
regime can be grouped into two main categories: a) SMIs; and b) the
requirements regarding the notification of major holdings of voting rights.
2.1.
Problems identified in relation to SMIs
There is no legal definition of SMIs in the
EU. Where reference is made to SMIs in this document, this should be understood
in terms of the existing national concepts used in MS. Improving the regulatory environment for
SMIs and facilitating their access to capital are high political priorities for
the Commission[7]. Although transparency
requirements are not considered to be the only source of problems faced by
SMIs, they contribute to the high costs of compliance linked to listing on the regulated markets,
their low visibility to analysts and investors, and the culture of
short-termism.
2.1.1.
High costs of compliance for SMIs
The objective of the Directive is to
provide accurate, comprehensive and timely information to the market. Issuers
are required to publish annual, half-yearly and quarterly financial information[8].
The Directive imposes a minimum requirement to publish Quarterly Interim
Management Statements with limited content. However, many MS require additional
items to be disclosed. For SMIs, the costs incurred through the publication of
quarterly financial information are relatively high, while the utility of this
obligation is not clear. In addition, compliance with the strict
deadline for the publication of half-yearly reports, as well as the complexity
of the content and the types of information to be disclosed in the narrative
parts of the reports, can also be costly and resource-intensive for issuers.
2.1.2.
Focus on short-term results
The need to publish quarterly financial
information could lead to pressure on management to demonstrate profits each
and every quarter. Quarterly reporting could also be perceived as a regulatory
incentive for investors to focus on the short-term performance of companies
rather than taking a longer-term view.
2.1.3.
Lower visibility of SMIs
The short deadline for the half-yearly
reports, (two months after the end of the reporting period), creates a
bottleneck at the end of the second month which disrupts the market, overloads
investors and analysts with financial information and accentuates the tendency
for them to restrict their attention to the largest market-leading companies,
and to take little interest in SMIs. This is particularly the case for the
majority of European issuers whose accounting year corresponds to the calendar
year, and for whom this deadline therefore falls in late August. This
contributes to the low visibility of SMIs in relation to investors and
analysts. The difficulties facing investors who wish
to access published information, due to the insufficient interconnection of the
various national storage mechanisms, is another issue limiting the visibility
of SMIs.
2.1.4.
Problems identified in relation to the notification of major
holdings of voting rights
The Directive requires issuers to notify
the market whenever they acquire or dispose of shares admitted to trading on a
regulated market to which voting rights are attached (that is, to notify the
proportion of voting rights held whenever that proportion reaches, exceeds or
falls below the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%). Two
problems have been identified with the current regime: hidden ownership as a
result of gaps in the rules for notification; and divergent notification rules
across MS.
2.1.5.
The possibility of hidden ownership
Since the adoption of the Directive, the
use of cash-settled derivatives in the market has increased substantially. Cash-settled
derivatives can be used to acquire and exercise influence over a listed company
or to build a hidden stake in a company (there are several reported examples of
such behaviour[9]). However, they are not
currently covered by the Directive’s rules for disclosure. This omission can
lead to possible market abuse, inefficiency in the price formation mechanism,
and empty voting, resulting in low levels of investor confidence and
misalignment of the interests of investors with the long-term interests of the
companies themselves.
2.1.6.
Divergent notification rules across MS leading to increased
liability and regulatory risk and high compliance costs for cross-border
investors
Divergent notification rules across MS, in
particular regarding aggregation of holdings of shares with those of the
financial instruments, raise costs and create legal uncertainty for investors
who participate in cross-border activity. Lack of aggregation of holdings of
shares with those of the financial instruments also leads to lower level of
transparency within some MS.
3.
Subsidiarity
The EU has the right to act in this area
according to Articles 50 and 114 of the TFEU. All the problems identified
concern the EU capital market in its entirety, and so, for changes to be
effective, they should be made at EU level. In addition, the problems identified
concerning SMIs derive from EU and MS legislation and can only be addressed
through changes in the EU legislation. Finally, only an instrument adopted at
the EU level would ensure that all MS apply the same regulatory framework based
on the same principles, thereby ending the current fragmentation of the
regulatory response with regard to the notification of major holdings.
4.
Objectives
The measures envisaged should simplify
certain obligations so as to help ensure that regulated markets are attractive
to SMIs, and should improve the legal clarity and effectiveness of the
transparency regime with respect to the disclosure of corporate ownership.
5.
Policy options: Analysis of impacts and comparison
To realise the objectives set out above,
the Commission has designed, analysed and compared different policy options to
determine which options satisfactorily address the problems identified. These
options are set out below.
5.1.
Policy options to allow for more flexibility
regarding the frequency and timing of publication of periodical financial
information for SMIs
(1)
No action – this
option would not achieve the objective. This option is therefore discarded. (2)
Abolish the obligation to present quarterly
financial information for SMIs – This option would
reduce both costs for SMIs and regulatory incentives which can encourage
short-termism. However, introducing differentiated regimes for companies listed
on regulated markets according to their size could be confusing for the
investors, and could also lead to lower visibility for SMIs. This option is
therefore discarded. (3)
Abolish the obligation to present quarterly
financial reports for SMIs during an initial period of 3 years after admission
to trading – Although alleviating the immediate
pressures faced by SMIs, this option would only delay the costs. Introducing
differentiated regimes for companies listed on regulated market according to
their size and their age could be confusing for the investors. This option is
therefore discarded. (4)
Abolish the obligation to present quarterly
financial reports for all listed companies – This
option would reduce companies’ compliance costs. The average estimated cost
reduction, excluding costs linked to preparation of the quarterly information,
ranges from 2 k€ to 60 k€ per year/per issuer for SMIs and from 35 k€ to 250 k€
per year/per issuer for large issuers. The reduction in costs concerning the
staff employed to prepare this information could not be estimated in monetary
terms for SMIs: this reduction varies widely from one issuer to another; from 8
man-days per year to 30 man-days per year. For large issuers, the maximum total
cost reduction (including costs linked to the staff involved in preparation of
these reports) could be estimated as being a maximum of 2 M€ per year per
issuer. It should enable the SMIs to redirect their resources to publish the
kind of information that best suits their investors. This option should reduce
short-term pressure on issuers and incentivise investors to adopt a longer-term
vision. It should not have a negative impact on investor protection. Investor
protection is already sufficiently guaranteed through the mandatory disclosure
of half-yearly and yearly results, as well as through the disclosures required
by the Market Abuse and Prospectus Directives[10]. Therefore,
investors should be duly informed about important events and facts that could
potentially influence the price of the underlying shares, independently of the
quarterly information as foreseen in the Directive. Thus, it does not seem
necessary to mandate disclosure of interim management statements in
legislation. To be effective, this option should also prevent MS from imposing
in national legislation the publication of quarterly information. Companies
would have discretion to publish quarterly information if they so desire. (5)
Extending the deadline for the publication of
half-yearly information to 3 months after the end of the relevant reporting
period for all listed companies – For SMIs, there
would be some cost savings, however the most important benefits would be
non-monetary. Issuers would have extra time to draft their reports, thus
improving the quality of their output. This option would also have a positive
impact on the visibility of SMIs as they would be able to time the publication
of their reports more easily so as not to fall at the same time as that of the
reports by large listed companies. This would mean analysts and investors would
have more time available to look at the half-yearly results of SMIs. (6)
Extending the deadline for the publication of
half-yearly information to 3 months after the end of the respective reporting
period for SMIs – This option would have positive
impact on visibility of SMIs. However, introducing differentiated regimes for
companies listed on regulated markets according to their size could be
confusing for investors. This option is therefore discarded.
5.2.
Policy options to simplify the narrative parts
of financial reports for SMIs
(1)
No action – this
option would not achieve the objective. This option is therefore discarded. (2)
Harmonising the maximum narrative content of
financial reporting at the EU level for SMIs – Standardising
the content of reporting may lead to increased compliance costs for SMIs
located in those MS where the requirements are currently low. This option
would, however, facilitate comparability of financial information across the
EU. But if the threshold for content at the EU level was set too low in the
hope of saving costs, this might in turn have negative implications for
investors. This option is therefore discarded. (3)
Requiring ESMA[11]
to prepare non-binding guidance (templates) on narrative content of financial
reports for all listed companies – This option
would enable ESMA to target the template so as to ensure cost savings. It would
also facilitate comparability of information for investors and could increase
the cross-border visibility of SMIs. It would entail some one-off costs for
ESMA. (4)
Requiring MS to prepare non-binding templates
or guidance on the content of the narrative aspects of reporting – This option would allow MS to adapt the content of the reports to
their internal market. It would not, however, facilitate the cross-border
comparability of information. This option is therefore discarded.
5.3.
Policy options to eliminate the gaps in
requirements for notification concerning major holdings of voting rights
(1)
No action – this
option would not achieve the objective. This option is therefore discarded. (2)
Broad regime: disclosure regime extended to
all instruments with similar economic effect to holding shares and to
entitlements to acquire shares – This option would
capture cash-settled derivatives, as well as any similar financial instruments
that may emerge in the future. It was supported by the majority of respondents
to the consultation as a solution to the problems described above. It would
have a strong positive impact on investor protection and confidence. The new
disclosure regime covering all types of financial instruments equivalent to share ownership might cause an increase in
the organizational and compliance costs for holders of cash-settled derivatives
(the maximum estimated one-off costs are from 100 k€ to 600 k€ per holder of
cash-settled derivatives, but they would concern only investors who hold a significant
quantity of these instruments). The ongoing costs could not be estimated as
they would vary depending on the increase in practice in the number of
disclosures per holder. However, following the experience in the UK which has
already introduced such a regime in 2009, the increase in notifications is
estimated to be limited. (3)
Limitative approach: disclosure not required
in case “safe harbor” criteria are met– This option
would require all instruments giving access to the underlying voting rights to be
disclosed unless some specified criteria are met. It would still enable
investors to circumvent the purpose of the disclosure requirement. This option
is therefore discarded.
5.4.
Policy options to eliminate divergences in
notification requirements for major holdings
(1)
No action – this
option would not achieve the objective. This option is therefore discarded. (2)
Harmonise the regime for the disclosure of
major holdings of voting rights by requiring the aggregation of holdings of
shares with those of financial instruments giving access to shares (including
cash-settled derivatives) – This option would
harmonise the method used to calculate the thresholds, but not the thresholds
themselves, thus creating a uniform approach that would reduce legal
uncertainty, enhance transparency, simplify cross-border investments and
increase the attractiveness of EU capital markets. The estimated reduction in
on-going costs for cross-border investors is 77 k€/year/operator. This option
could, however, create some additional costs linked to additional disclosures
in those MS where there is currently no aggregation requirement. (3)
Harmonise the regime for the disclosure of
major holdings of voting rights by requiring 3 separate regimes of disclosure:
one for holdings or shares, one for financial instruments giving access to
shares, and one for cash-settled derivatives – This
option would create a uniform regime, but may have a negative impact on
investor protection and confidence. This option is therefore discarded. (4)
Harmonise the regime of disclosure of major
holdings of voting rights by harmonising the thresholds for disclosure – The thresholds of voting rights were not considered a major issue by
the majority of respondents. In addition, thresholds for notification seem to
be difficult to harmonise because of the differences in shareholding population
from one MS to another. This option is therefore discarded.
6.
The
Instrument to be used and Transposition and Compliance Aspects
Only a binding legal instrument would
ensure that all MS apply the same regulatory framework based on the same
principles. A directive would allow for maximum harmonisation in some areas,
but would still leave MS flexibility to allow their specific situation to be
taken into account in other areas. To ensure a better implementation of the
Directive, and following the Commission’s Communication “Reinforcing
sanctioning regimes in the financial sector”[12], the existing
framework for sanctions should also be improved.
7.
Monitoring and Evaluation
The Commission will monitor how the MS
implement the Directive. Where needed, the Commission services will offer
assistance to the MS. The evaluation of the impact of the application of the
legislative measures should take place six years after the entry into force of
the legislative measures. The Commission will monitor the application of the
Directive, as amended, through ESMA and through extensive dialogue with major
stakeholders. [1] Directive 2004/109/EC of the European Parliament and
of the Council of 15 December 2004. [2] The term regulated information includes, annual,
half-yearly and quarterly financial information, on-going information on major
holdings of voting rights and ad hoc information disclosed pursuant to the
Market Abuse Directive (Directive 2003/6/EC). [3] COM (2010) 243 FINAL of 27 May 2010. The report was
accompanied by a more detailed Commission staff working document
(SEC(2010061)). [4] Cash-settled equity derivatives refer to equity
linked transactions settled by the payment of cash only without any physical delivery
of the underlying equity. [5] http://register.consilium.europa.eu/pdf/en/10/st15/st15650-ad01.en10.pdf [6] The Fourth Council Directive
78/660/EEC on annual accounts and the Seventh Council Directive 83/349/EEC on
consolidated accounts. [7] Communication from the Commission: "Towards a
Single Market Act - For a highly competitive social market economy - 50
proposals for improving our work, business and exchanges with one
another", COM(2010) 608 final and Communication from the Commission "Single
Market Act - Twelve levers to boost growth and strengthen confidence- Working
together to create new growth", COM(2011) 206 final. [8] Either quarterly financial reports or interim
management statements: also referred generally as quarterly financial
information. [9] Exemples:
LVMH/Hermes, Porsche/VW, Schaeffler/Continental. [10] Directive 2003/6/EC and Directive 2003/71/EC. [11] European Securities and Markets Authority. [12] Communication of 9 December 2010: COM(2010)716 final.