RNS and the new Transparency Directive - London Stock Exchange

YOUR TRUSTED LINK TO THE WORLD’S FINANCIAL COMMUNITYRNS and the new Transparency Directive

ContentsSection1 Pulling together: The Transparency Directive overview2 Strength in numbers: How to disseminateinformation effectively3 Clarity and transparency: What the TransparencyDirective means for you4 The missing link: Looking to the future5 Glossary: Key terms explained

Introduction• The Transparency Directive takes effect in the UKfrom 20 January 2007.• This guide from RNS is intended to help companiesand their advisers understand more about theDirective and its impact on them.• We explain what the Transparency Directive is andthe inspiration behind it.• We describe how the Directive will be applied in the UKand we explain the part RNS has played – and will play– in its implementation.• We also explain the way in which the TransparencyDirective dovetails with other EU Directives, all ofwhich are intended to make European capital marketswork more seamlessly and effectively.

“The test for the Directive is how far it succeeds in raisingstandards of company reporting in jurisdictions where they havenot been very high, without damaging practice in jurisdictionswith higher standards, such as the UK. I think we can berelatively optimistic on both counts”Peter Montagnon, Director of Investment Affairs, Association of British Insurers1 Pulling together:The Transparency Directive overview1.1 The Transparency Directive overviewThe Transparency Directive will create a frameworkfor companies across Europe to adopt similarstandards around information disclosure.The Directive has evolved over several years andhas been influenced by consultation with a numberof interested parties, both in the UK and overseas.The impact of the Directive will be greater injurisdictions where there is a less well developeddisclosure regime, so the impact for UK companieswill be limited.The Directive requires companies to discloseinformation at regular intervals through specificchannels and, in that way, it bears many similaritiesto the existing UK regime. But there are certainareas in which the Directive will place new demandson companies and their directors, particularly withrespect to forward-looking statements.Generally speaking, the Transparency Directivewill not apply to AIM companies; however, therequirements concerning disclosure of voting rightswill apply to UK AIM companies. This requirementis explained in more detail later in Chapter 3.1.2 The rationaleThe brainchild of the European Commission,the Transparency Directive is part of a broaderproject – the Financial Services Action Plan (FSAP) –designed to create a single European capital market.The Transparency Directive works alongside otherpieces of FSAP legislation, in particular the MarketAbuse Directive (MAD).Both cover disclosure but while the MAD focuseson the need to disseminate inside information assoon as possible in order to avoid market abuse,the Transparency Directive focuses on theinformation that needs to be disclosed on a periodicbasis, as well as shareholder disclosures and the wayin which disclosure should take place.Until now, each country in Europe has operatedindependently, imposing its own legislation andguidelines on companies and investors. Somecountries have been more lax than others, both interms of the amount of information to be disclosedby companies and the amount of informationdisclosed by investors.This unlevel playing field has disadvantagedcompanies and shareholders. And in recent years,the need for a harmonised European capital markethas intensified, reflecting a growing desire amongglobal investors for dynamic disclosure – that is,immediate disclosure when there is somethingimportant to say.In most instances, the UK is already there. Much ofthe content within the Transparency Directive hasbeen based on London best practice and regulatorsand interested parties in London, including RNS,have been widely consulted.1.3 The benefitsThe Transparency Directive should benefit companiesand investors. In the past, investors have found ithard to compare information on companies fromdifferent countries in Europe and this has, at times,made them more cautious about investing. Greatertransparency will make comparative analysis easierfor investors and this is expected to boost shareholderconfidence. The cost of capital should also bereduced, for at least some companies, as investorsshow their preference for corporate transparency.

1.4 The key pointsIn essence, the Transparency Directive covers thecontent and regularity with which companies shouldreport financial information and the way in whichthat information should be relayed to the market.The Directive also obliges investors to disclosekey shareholdings:• For companies, the Directive requires them toproduce annual and half-yearly (formerly interim)financial reports. In addition, the Directive obligescompanies to produce an “interim managementstatement” for the first and third quarters of theirfinancial year. This is a new requirement forcompanies that do not already report quarterlyand the specific nature of these statements isan ongoing topic for debate between companiesand regulatory authorities.• Companies are also obliged to disclose regulatedinformation 1 on a fast and pan-European basis.For UK-listed companies, this is, broadly-speaking,business as usual. They already use RegulatoryInformation Services, such as RNS, to disseminateinformation widely and speedily. In Europe, however,different methods have predominated – such asdissemination via print media or company websites.• The Transparency Directive places demandson investors too as they are obliged to notifycompanies once they have built up certainshare stakes.• Finally, the Directive requires member statesto ensure there is at least one Officially AppointedMechanism (OAM) for the central storage ofregulated information. The precise nature ofthese OAMs is subject to continuing discussionand will involve a further phase of consultationand implementation.1.5 The Transparency Directive in the UKIn all four areas listed above, the TransparencyDirective has been informed by the UK model andrecognition has been given that this model works,and works well.The legislation is, however, a “minimumharmonisation directive”, which means thatEU member states, such as the UK, can imposeadditional requirements (known as superequivalence)on companies and investors.In the UK, the Financial Services Authority (FSA) istasked with implementing the Transparency Directivebut it has sought the views of various representativebodies and interested parties, including the LondonStock Exchange.While some aspects of implementation are yet tobe finalised and best practice interpretation willevolve, the Directive will become a fact of Europeancompany life in early 2007. The final rules 2 for initialimplementation (excluding OAMs) were publishedin October 2006 and markets will be expected toimplement the Directive from 20 January 2007.1Regulated information is all the information that is required to be disclosedunder the Transparency Directive, inside information and any otherinformation requirements required in the home member state.2Subject to European Commission finalisation of implementation measuresand Royal Assent to the UK Companies Bill.

2 Strength in numbers:How to disseminate information effectively2.1 RNS is the leading service provider for disclosureof regulated information in the UK market:• eight out of ten UK companies use RNS• nine out of ten UK companies use RNS forprice-sensitive announcements• over 90% of the FTSE100 companies use RNS• RNS releases over 650 announcements a dayon average.Since 1990 RNS has been the foremost regulatorynews distribution service in the UK and worksalongside other leading financial news distributorsacross the world.With more expertise in distributing regulatoryannouncements than any other organisation, RNSallows issuers to have confidence their informationwill be disseminated efficiently, securely and inaccordance with local regulatory regimes.RNS distribution channels use the London StockExchange’s trading infrastructure, which is knownfor its performance and resilience. Our clientsare assured their needs are met even whenunder pressure.2.2 RNS and the Transparency DirectiveRNS already meets the requirements of theTransparency Directive in that it achieves pan-European and global disclosure.This means RNS customers can continue todisseminate information in exactly the same way asthey have traditionally done, once the TransparencyDirective takes effect.RNS meets the Financial Services Authority’s(FSA) requirements for UK dissemination, whichauthorises Primary Information Providers (includingRNS) to act as Regulatory Information Services.The FSA will retain this system after implementationof the Transparency Directive.Strict guidelines apply to these authorised providersof information so users of RNS can feel comfortableabout submitting regulated information and can besure that announcements will be handled speedily,efficiently and securely. However, RNS sees theseas minimum standards and makes sure its serviceand performance levels exceed what is required inthe FSA’s approval criteria.Customers appreciate, for example, the extendedsupport hours offered by RNS and the wide-rangingtechnical and regulatory knowledge of its supportteams. A recent survey revealed, in fact, that almost100% of queries are swiftly answered to customers’satisfaction.2.3 Pan-European disclosureThe Transparency Directive requires companiesto disseminate information on a pan-Europeanbasis providing rapid disclosure and equality ofaccess to investors. RNS satisfies this requirementby distributing information to electronic financialmedia firms such as Reuters, Bloomberg,Dow Jones and AFX.These media services disseminate the full text ofall regulated information and information is availablevia financial websites too so it can be easily accessedby hundreds of thousands of retail investors,investment professionals and global stakeholders.News disseminated by RNS is highly regarded andtrusted worldwide, helping RNS’s clients’announcements gain maximum exposure.

“I think the RNS team is fantastic. They have gone above andbeyond the call of duty when it comes to submitting our verytechnically challenging 23-page earnings press release”IR Project Co-ordinator, Sony CorporationRNS process flow diagramCompany submitsannouncementUsing RNS’s intuitivesubmission tools• Security• Formatting• Reliability• Customer service• Market efficiencyAnnouncementdistributed throughthe Exchange’strading andinformation networkElectronicFinancial MediaIncluding:• Bloomberg• Thomson Reuters• AFX• ProquoteAnnouncement filed with FSA(Via AFX)Market professional servicesOver 750,000 dealer terminalswithin financial institutions worldwideFinancial websites/Online mediaInternationalregulatory filings(eg, EDGAR) andmedia distributionIncluding:www.advfn.comwww.bloomberg.comwww.investegate.co.ukwww.londonstockexchange.comwww.reuters.comNewswires and IR providersIncluding:AFXDow JonesFactsetHemscottInvestisFinancial databasesIncluding:FactivaLexis-NexisPerfect information

3 Clarity and transparency:What the Transparency Directive means for youThis section of our guide addresses the most commonlyasked questions about the Transparency Directive andrelated EU Directives.3.1 What are the main differences between theTransparency Directive and existing UKrequirements?There are three key differences:• First, all companies will be required to publishfinancial statements four times a year – an annualreport, a half-yearly report and two interimmanagement statements or quarterly reports.• Second, the half-yearly report will need to includethe principal risks and uncertainties to a company’sbusiness for the remaining six months of the year.• Third, the annual report will need to be publishedwithin four months of the year-end rather than sixmonths. Companies will no longer be obliged topublish a preliminary statement of annual results,although they can still do so.3.2 What will companies have to include in theannual report?The annual report will have to include auditedfinancial statements, a management report andresponsibility statements. The management reportmust include a fair review of the business and adescription of the principal risks and uncertaintiesof the business going forward. Among therequirements on content, the review must includekey performance indicators, financial and nonfinancial.Environmental and human capital KPIs musttherefore be included. These requirements are notbroadly different from those already applicable tomost UK-incorporated companies.3.3 What will companies have to include in the halfyearlyreport?The half-yearly report (previously referred to as“interim results”) will have to include a condensedset of financial statements as currently required forUK-listed companies, a management report andresponsibility statements. Among the requirements,the report will also have to include, for the first time,a statement of the principal risks and uncertaintiesthat may affect the business over the followingsix months.3.4 What are interim management statements and whatwill companies have to include in them?Interim management statements are publishedreports that will be issued between the annual reportand the half-yearly report and again between the halfyearlyreport and the annual report. The TransparencyDirective has deliberately refrained from calling themquarterly reports because they are intended to bequalitatively different from US quarterly earningsstatements.Interim management statements will give a generaldescription of a company’s financial position andperformance and describe any material events ortransactions that have taken place during thereporting period. They will be more detailed thanUK-style trading statements but less prescriptivethan US quarterly earnings reports. The FinancialServices Authority (FSA) will provide guidance onwhat does not need to be included in interimmanagement statements. This will be published ina special edition of List! the newsletter from the UKListing Authority. The FSA has introduced a newannouncement headline for these disclosures,“Interim management statements.” Thosecompanies that already publish quarterly reports maycontinue doing so and will not have to publish interimmanagement statements as well.

3.4 Will preliminary statements still be necessary?Most companies will probably continue to issuepreliminary statements, even though theTransparency Directive does not oblige them to doso. First, investors are very much in favour of them.Second, companies are used to publishing them andtheir systems are geared up to do so. Third, if theyare preparing their annual results and discover amaterial piece of information, they will have to makean announcement without delay. Companies that dochoose to publish preliminary statements will berequired to meet the existing content standards.3.5 Should companies be worried about increasedliability?The Transparency Directive requires companies tomake more forward-looking statements than beforeand to make reports public throughout the EU(regardless of whether companies have shareholdersor a listing in every member state). There is someunderstandable concern about this but lawyerssuggest that, for UK companies, the normal highstandards of care with which information is producedshould be sufficient to prevent them from being suedby investors. The Companies Bill contains “safeharbour” provisions for Transparency Directiveperiodic reporting, effectively stating that directorsare only liable to investors if they are being dishonestor reckless. There is discussion about extending thisto include preliminary statements of results.3.6 When will the changes take effect?The Transparency Directive will apply to financialyears that begin on or after 20 January 2007. Thismeans that companies whose year end is 31 Marchwill be required to publish their first interimmanagement statement in June to August 2007.Thereafter, their half-yearly and annual reports willhave to be Transparency Directive-compliant.Companies with a 31 December year-end will nothave to publish their first interim managementstatement until March to May 2008. And their firstTransparency Directive-compliant annual report willnot be produced until 2009.3.7 How will the annual cycle work in practice?The Directive states that interim managementstatements must be made at least ten weeks afterthe start of each half-year and six weeks before theend of the period. Broadly speaking, this equatesto the first and third quarters of the financial year.Companies with a 31 December year-end, forexample, will publish their first interim managementstatement no earlier than mid-March and no later thanmid-May. Their second interim managementstatement will be published no earlier than the mid-September and no later than mid-November.3.8 How will the changes take effect?The Transparency Directive will be implemented inthe UK by 20 January 2007. The FSA will incorporatethe new transparency rules into its Disclosure RulesSourcebook and rename it the Disclosure andTransparency Rules Sourcebook. If a company orcompany director breaches these rules, they canbe sanctioned or fined. Some parts of the Directivealso require primary legislation and these will beincorporated into the new Companies Act.

“The Transparency Directive is sometimes portrayed as the end of the known world.It isn’t by any means. For UK companies that are competitive, successful and havestrong prospects, making these more transparent to a wider class of investors quickerand electronically is a good thing and a potential competitive advantage”Charles Mayo, Partner, Simmons & Simmons3 Clarity and transparency (cont.):What the Transparency Directive means for you3.9 How will companies disseminate the informationthey are now required to disclose?The Directive requires Member States to ensureregulated information is disseminated throughoutEurope to ensure that investors have fast access ona non-discriminatory basis. Companies are ultimatelyresponsible for meeting this standard. In practice,UK companies will be able to comply with this bysending financial information to an RIS, such as RNS.The role of the RIS is to ensure that the informationis transmitted to media services like Reuters andBloomberg rapidly and securely. There is no longera requirement for companies to publish half-yearlyreports in newspapers or send them to every holderof their securities.3.10 How will information be filed?The Directive requires companies to file informationwith the competent authority of its home memberstate. In the UK, companies satisfy this requirementby using an RIS.3.11 What are the requirements for storage ofregulated information?Under the Transparency Directive, all regulatedinformation must be filed for five years after it hasbeen disseminated to provide a comprehensiveresource for investors. Rather than a centralisedrepository such as the SEC’s EDGAR system, adecentralised model is envisaged with one or moreOAM appointed in each member state. These willthen be networked across Europe. How this will workin practice is still being defined and will not be in placefor January 2007. As a transitional measure in themeantime, the FSA is enhancing the RIS section ofits website to provide more accessible links toinformation providers.3.12 Will the Transparency Directive impactinvestors too?The Directive will require investors to issue anotification when they have reached, exceeded or fallenbelow 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%of the voting rights in a company. At present, investorsin UK companies typically have to issue a notificationwhen they have built up a shareholding of 3% and at 1%intervals thereafter. The present thresholds willcontinue to be applied to both Main Market 1 and UKAIM companies. The FSA is requiring disclosure to bemade by using a standard form and is also retaining thecurrent deadlines for notifications by investors tocompanies and by companies to an RIS. Therequirements for notification are triggered byreference to the percentage of voting rights held,rather than the percentage of the nominal value ofshare capital in which a shareholder is interested.3.13 Do companies need to disclose details ofvoting rights?To provide a reference point for major shareholdernotifications, companies must disclose details of thetotal number of voting rights in respect of each classof share which it has issued and admitted to trading.Companies must also distinguish the number ofvoting rights attached to any shares held in Treasury.3.14 When must companies disclose details of theirvoting rights?Companies must make this disclosure to the marketvia an RIS by 31 December 2006. Companies willalso have to disclose any change which occursbetween the date on which the disclosure is madeand 20 January 2007. Any subsequent changes willneed to be disclosed on a monthly basis. The FSAhas introduced a new announcement headline typefor these disclosures, “Total Voting Rights’”.1Companies incorporated outside the EU may use their home jurisdiction’sshareholder notification regime if it is equivalent to that required by theTransparency Directive.

3.15 Will other Directives, linked to the TransparencyDirective, have an impact on companies andinvestors?Another key element of the FSAP is the MarketAbuse Directive (MAD). As its name suggests, thisincludes a series of preventative measures aimed atreducing the incidence of market abuse. Themeasures cover the way companies handle anddisclose inside information and it obliges companiesand their advisers to maintain “insider lists”.3.16 What constitutes inside information?Inside information is information that is precise, notgenerally available and price sensitive. The rules onhow to identify inside information, when to discloseit and communication with third parties are set outin the FSA’s Disclosure and Transparency RulesSourcebook. Issue nine of List! provides furtheradvice on good practice with respect to insideinformation.3.17 What are the requirements for handling insideinformation?Companies need to have appropriate systemsand controls in place to identify inside informationand ensure its timely disclosure. Companies mustalso notify a RIS as soon as possible of any insideinformation that directly concerns them, except inspecific circumstances where disclosure wouldprejudice their legitimate interests.3.19 What are PDMRs?PDMRs are defined as “Persons DischargingManagerial Responsibility”. In practice, this meansmain board directors, both executive and nonexecutive,as well as senior managers with theauthority to make strategic decisions.3.20 What are Annual Information Updates?Annual Information Updates are a requirement ofthe Prospectus Directive, which also forms part ofthe Financial Services Action Plan. These updatesare a compilation of all the disclosures a companyhas made in the UK and abroad over the past12 months. Most companies comply with therequirement by publishing a digest of announcementheadlines and the dates on which they appeared.3.21 Does the Transparency Directive have an impacton AIM companies?Generally speaking, the Transparency Directive doesnot apply to AIM companies. But they will need todisclose voting rights, alongside Main Marketcompanies, and AIM companies may be affected bysome parts of the new Companies Act. The MADalso applies to AIM companies, although certaindisclosure obligations (such as insider lists) do not.Generally speaking, the Prospectus Directive will notapply to AIM companies unless they make an offer tothe public which falls within scope.3.18 What are the requirements for publishing insideinformation on the company’s website?If companies announce any inside information via anRIS, they must make that information available ontheir website by the close of the next business day.The information may not be published on the websitebefore it is announced via an RIS and it must beavailable on the website for at least a year.

4 The missing link:Looking to the futureAs this guide makes clear, the world of financial disclosureis evolving. At RNS, our aim is to help companies adapt tothe new environment with minimum disruption.Over the past few years, customers will have already seenseveral significant changes to our service. Whereaspreviously our expertise lay in UK regulatory newsdistribution, we have now diversified to deliver a morecomprehensive suite of communication services to ourcustomers. We transmit information not only throughregulatory channels but also through the financial media –and we distribute not just in the UK but to jurisdictionsacross the globe.RNS ReachThis provides companies with an ideal platform todeliver important news, such as product launches andcontract wins to the key financial audience via the samedistribution channel.The Financial Services Action Plan (FSAP) and the adventof new interactive technologies will have a profound impacton the European disclosure landscape. But the LondonStock Exchange and RNS are committed to staying at theforefront of new developments.We have already influenced the way in which the FSAP willbe implemented in the UK and we are also monitoringinteractive technology developments closely.Our systems will evolve so that we stay ahead of changeas it occurs. In fact, we have already started work on aproject to transform the RNS user interface and greatlyimprove the service we offer our customers.In the next few years, we expect developments, suchas interactive data, to gain momentum. This will nothappen overnight however and needs widespreadsupport for adoption. As these developments take shapewe will make sure our customers are kept fully informed.Worldwide media distributionWe distribute announcements to key financial media andbest-practice disclosure points in Europe and the US,including those recommended by the New York StockExchange and NASDAQ.Worldwide regulatory distributionWe can distribute your announcements to fulfil German,Swiss and Austrian disclosure obligations in Europe, andwe can file announcements in the US via the SEC’sEDGAR system. All disclosure is seamless through theRNS user interface. And it is often much cheaper than ourcompetitors.FT Company Announcement ServiceThis new service allows companies to publish theirannouncements in the world’s leading businessnewspaper. RNS clients can do this through theclient interface.

“We will continue to track and be involved with internationaldevelopments on the disclosure landscape and we will adaptour systems in the most sympathetic way for customers,communicating with them on every step of the journey”Paul Rennison, Head of RNS

For further informationIf you have any questions about the contents of thisguide, we would be happy to talk to you. Contact us on020 7797 4400 or rns@londonstockexchange.com

Glossary of termsProspectus DirectiveSets out the initial disclosure obligations for issuersof securities that are offered to the public or admittedto trading on a regulated market in the EU. It enablescompanies to raise capital across the EU on the basisof a single prospectus.Regulated informationInformation that companies are required to discloseunder the Transparency Directive, Market AbuseDirective and Prospectus Directive. Includes periodicreporting, shareholder disclosures, inside informationand any other information requirements made by thehome Member State.Regulated Information Service (RIS)A Primary Information Provider that has been authorisedby the FSA.Transparency DirectivePart of the FSAP and designed to establish minimumstandards for periodic reporting, major shareholdingnotifications and the dissemination and storage ofregulated information.

Glossary of termsExtend this flap while reading through this guideif you wish.Annual Information UpdatesAnnual Information Updates (a requirement of theProspectus Directive) need to contain or refer toall the information that has been published or madeavailable to the public over the preceding 12 months.Companies Act 2000This gave the Financial Services Authority (FSA) statutorypowers to become the regulator of the financial servicesindustry in the UK.Disclosure and Transparency Rules SourcebookProduced by the FSA, this will incorporate the newTransparency Directive rules. Previously calledthe Disclosure Rules Sourcebook.Electronic data gathering, analysis andretrieval system (EDGAR)System set up by the US Securities and ExchangeCommission for receiving and disseminatingcorporate filings electronically.The Financial Services Action Plan (FSAP)The EU initiative to improve the single market in financialservices. The Transparency Directive is part of the FSAP.Inside informationInformation that is precise, not generally availableand price sensitive in accordance with theMarket Abuse Directive.Insider listsCompanies are required to keep a list of everyone who hasaccess to insider information, including directors, otheremployees and external advisers.Interim management statementsPublished reports that will be issued by listed companiesbetween the annual report and the half-yearly report andagain between the half-yearly report and the annual report.List!A newsletter from the UK Listing Authority, which providesinformation and guidance of interest to listed companies.It is available from the FSA’s website (www.fsa.gov.uk).The Market Abuse Directive (MAD)Part of the FSAP and aimed at reducing the incidence ofmarket abuse. It covers the way companies handle anddisclose inside information and obliges companies andtheir advisers to maintain “insider lists”.Officially Appointed Mechanism (OAM)A mechanism for the central storage of regulatedinformation. Each EU member state is required to haveat least one of these, appointed by the local regulator –in the UK’s case, the FSA.Persons Discharging Managerial Responsibility (PDMR)Relating to main board directors, both executive and nonexecutive,as well as senior managers with the authority tomake strategic decisions.Primary Information Provider (PIP)Corporate news distribution services which may beapproved by the FSA to act as Regulatory InformationServices (RIS) for the distribution of regulatoryinformation on behalf of listed companies.

Copyright © May 2009 London Stock Exchange plc. Registered inEngland and Wales No. 2075721.London Stock Exchange plc has used all reasonable efforts to ensurethat the information contained in this publication is correct at the time ofgoing to press, but shall not be liable for decisions made in reliance on it.London Stock Exchange and the coat of arms device are registered trademarks of London Stock Exchange plc.All other logos are trade marks of their respective owners.London Stock Exchange10 Paternoster SquareLondon EC4M 7LSTelephone: +44 (0)20 7797 1000www.londonstockexchange.comCOR/IRS/COL/092