Disclosure & Transparency Rule Changes

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Proposed changes to DTR for Issuers of Securities admitted upon a Regulated Market

25th November 2015

The regulator has just launched a new consultation this week on provisions to delay the disclosure of inside information within their Disclosure and Transparency Rules.

The FCA’s Consultation Paper CP 15/38 addresses developments associated to the disclosure of inside information by issuers with securities that are admitted to trading on a regulated market.

The intention of the regulator’s Disclosure and Transparency Rules (DTR) is to support and encourage a properly operating market, thus created by ensuring investors have enough information to make properly informed investment decisions and that this is provided in a timely manner. As such, the guidance the FCA provides within its DTR applies to issuers with securities that are admitted to trading on a regulated market.

The regulator has now informed that they have reviewed and considered the guidance within DTR and as a result they are proposing some changes to the guidance that relates to dealing with the circumstances where a listed company has a ‘legitimate interest’ in delaying the disclosure of inside information. These changes are also considered to be consistent with the existing Market Abuse Directive (MAD) and the Market Abuse Regulation (MAR) that comes into effect next July.

What is Inside Information?

As the FCA advises, the Financial Services and Markets Act 2000 (FSMA) definition of inside information provides the foundations for the rules on prohibiting abusive trading in UK markets and the disclosure of information by issuers, both of which are implemented in the UK through the Disclosure and Transparency Rules (DTR) and apply to issuers with financial instruments admitted to trading on a regulated market.

In relation to qualifying investments, or related investments, which are not commodity derivatives, issuers trading on a regulated market must assess information using the statutory ‘Inside Information’ test within FSMA.

FSMA states that “inside information is information of a precise nature which—

is not generally available
relates, directly or indirectly, to one or more issuers of the qualifying investments or to one or more of the qualifying investments and
would, if generally available, be likely to have a significant effect on the price of the qualifying investments or on the price of related investments.”

In addition, FSMA later extends the last provision above by detailing

“that information would be likely to have a significant effect on price if and only if it is information of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions”

These particular specifications relating to ‘a significant effect on price’ and thus when information may be deemed ‘inside information’ have long been debated in the market. Should each provision be considered separately or should they be considered in conjunction with each other? Previous final notices and Upper Tribunal judgments such as those of JJB Sports plc, Ian Hannam and David Massey vs the regulator all refer to this issue which the regulator discusses within its most recent Consultation Paper (CP 15/38)

Since the legal definition of inside information underpins both market abuse and disclosure of information by issuers, the provisions that allow for a delay in this disclosure are the differentiator with regards to when information needs to be disclosed to the market by an issuer.

DTR: Disclosure of Information and Delay for Legitimate Reasons

In light of the debate and discussions surrounding recent inside information and Market Abuse cases, the FCA is aware that investors and issuers within the market may at times have differing views on what constitutes Inside Information and, that for either to understand their obligations, this needs to be addressed.

“In the interests of both parties, there should be clarity on whether inside information is being passed. Therefore, both issuers and investors have a clear interest in understanding the basis for classifying information as inside information so that they can properly understand their obligations”

FCA, CP 15/38 November 205

The requirement to disclose inside information as soon as possible and the ability to delay for legitimate reasons, such as while negotiating a transaction, is a difficult balance for DTR to address but one that is “crucial to setting an appropriate framework for disclosures” as the FCA advises.

Provisions must “support timely access to inside information but also allow for some delay to protect issuers’ legitimate interests.”

For this, the regulator looks to the Market Abuse Directive (MAD) and as of next summer, to the Market Abuse Regulation (MAR) to clarify and put together the conditions for delay of disclosure within DTR where there are circumstances of legitimate interest.

The Market Abuse framework requires issuers to disclose inside information as soon as possible whilst allowing them to delay this disclosure in limited circumstance to protect their legitimate interest as long as three conditions are met. Should any of these conditions not be met, then the issuer must disclose the information, regardless of whether delaying this would be in their legitimate interest.

Conditions for delay of disclosure:

 the omission would not be likely to mislead the public;

 the person receiving the information is subject to a duty of confidentiality; and

 the issuer is able to ensure the confidentiality of the information.

But what exactly is meant by ‘legitimate interest’ and when might these circumstances arise? That is the tricky question that the regulator now faces. Comments upon their proposed rule changes should be submitted by 20th February 2016.

Disclosure & Transparency Rule changes

Comment from the FCA:

“In the interests of both parties investors & issuers], there should be clarity on whether inside information is being passed. Therefore, both issuers and investors have a clear interest in understanding the basis for classifying information as inside information so that they can properly understand their obligations”

FCA CP 15/38