EU Transparency Directive Seeks to Reshape Reporting

The European Union is struggling toward a new Transparency Directive intended to pressure companies to be more forthcoming with the news—good and bad—they must report to investors.

Gone is the rule that the EU’s 8,000 listed companies must report financial information on a quarterly basis. Instead, the “TD,” as it is known, requires semi-annual reports and early disclosure of any material information that could affect financial results. The directive also allows national regulators to sanction companies if they do not issue information on “a timely basis.” In other words, it puts the onus on companies to report material information at an appropriate time.

Skinner

Peter Skinner, a member of the European Parliament who is shepherding the proposal through the EU’s labyrinthine legislative process, says traditional quarterly reporting allowed companies to mix their good and bad news together. That can confuse smaller investors, while larger or institutional investors still reap the benefit of advice from professional analysts. The proposed new directive, he says, replaces “a functional approach with a real time approach—a question of substance, not form.”

Skinner even has in mind the official wording of what companies would need to provide: “an explanation of material events and transactions that have taken place during the relevant period and their impact on the financial position of the issuer and its controlled undertakings and a general description of the financial position and performance of the issuer and its controlled undertakings during the relevant period.”

All EU-wide legislation must be “transposed” into nation-specific law by the EU’s 27 member states; keeping those transpositions in harmony can be difficult, and the TD is no exception. But in some ways the directive is already bringing in benefits. For instance, it is already incorporated into the Companies Act in Britain; Germany and France have also put it in operation. Other national governments, however, lag behind in transposing the code into national legislations. At the last count, there were six backsliders, including Italy, the Netherlands, and Luxembourg.

They are way past the deadline, which was January 20, 2007. Furthermore, none of the submissions sent in to Brussels—including that from Britain—has yet been officially categorized as “conforming” to the directive as laid out by the European Union.

McCreevy

The TD fits into a pattern of other legislative codes, all aimed at enhancing the EU’s capital market transparency. Charles McCreevy, commissioner of the Internal Market for the EU, has said that, “more frequent, timely, and reliable information from issuers will help re-install confidence in European financial markets.”

Lannoo

More specifically, Karel Lannoo, secretary general of the European Capital Markets Institute, sees the Transparency Directive as closely related to the Prospectus Directive, which governs what companies must disclose when raising money on the public markets. Another close relative is the Market Abuse Directive, which polices insider dealing and market manipulation, and bans “fictitious devices or any other form of deception or contrivance” that may “give false or misleading signals.” MAD also requires companies to publish all price-sensitive “inside” information immediately.

Difficulty Ahead

Petr

Still, as it sails forward, the TD is experiencing all sorts of rough seas. Ondrej Petr, an adviser to the International Capital Market Association, cites a letter his group wrote with the Securities Industry and Financial Markets Association. The letter complains that “staggered implementation” and inconsistent application of the directive in different EU countries makes for problems—“particularly acute” for large shareholders disclosing significant positions they’ve taken in companies, “where internationally active investors need to have in place systems ensuring simultaneous compliance.”

Another bureaucratic headache: the Transparency Directive is a “minimum harmonization” rule. That is, as national governments do get around to transposing the TD into local law, they can impose more stringent requirements than the rule specifies—such as full quarterly reporting.

Quarterly reports are already required by many stock exchanges in continental Europe and in the United States, but they do have their critics in European circles. Advocates against quarterly reporting believe that it leads to short-term, “profit focused” reports, undermining long-term economic development, according to Saskia Slomp, technical director at the European Federation of Accountants. Britain even argued against quarterly reporting when the TD was first drafted.

Reaction in the “real” (read: non-regulatory) world runs from unimpressed to “blissfully unaware,” as one fund manager puts it. Even a spokesman for the London Stock Exchange dryly says: “The TD is unlikely to have a high profile for trading within the United Kingdom.”

Paul Martin, global head of compliance at Fortis Investments, gives a more typical reaction. He praises the spirit of the law, but criticizes the unclear terms in it. He does believe the TD will be very beneficial, although it may take as long as a year to settle in.

Martin suggests that in place of “over-legalistic” interpretation, regulators should simplify their approaches and enforcement wherever possible, especially on compliance with reporting on positions of asset managers. Like others, no doubt he would be pleased that the Committee of European Securities Regulators is raising questions over provisions “being applied in a consistent manner in the different jurisdictions.”