14 July 2002

 

European Commission
Internal Market Directorate General
Avenue de Cortenbergh, 107
B-1000 Bruxelles
Belgique

 

Re: Revision of the Investment Services Directive

 

Dear Sir or Madame:

 

The European Advocacy Committee (EAC) of the Association for Investment Management and Research (AIMR)¹ is pleased to comment on the European Commission's proposal, Transparency Obligations for Issuers Whose Securities Are Admitted to Trading on a Regulated Market. The EAC is a standing committee of AIMR charged with reviewing and responding to major new regulatory, legislative, and other developments that may affect investors, the investment profession, and the efficiency and integrity of European financial markets.

 

General Comments

 

The EAC is supportive of the Commission's transparency agenda, in general, and is particularly supportive of its efforts to enhance the transparency of the financial situation, performance, ownership and governance structures of companies operating in the European Union (EU). Efforts to increase the frequency of reporting can only enhance the ability of investors to make informed valuation decisions about companies and, as a result, improve the efficiency in Europe's public equity markets.

 

Specific Comments

 

Section 3
Parts 3.1 and 3.2. "Annual financial reporting" and "Quarterly financial reporting."

While the Committee emphatically supports the proposal to require companies to disclose information on institutional functioning of a firm, we urge the DG to adopt its original 60-day annual report and 45-day quarterly report publishing requirement instead of the 90-day annual report and 60-day quarterly report proposed in the Second Consultation. We make this suggestion for three reasons.

First, adopting a more lenient reporting period at this time runs counter to what is taking place in other markets and, as a result, could put public trading markets within the Eurozone at a competitive disadvantage. Efforts by regulators in the United States and Canada to soon require listed companies to publish annual reports within 60 days of fiscal year end, and interim reports within 45 days of quarter end, will make critical information available to investors to use for more timely assessments of the relative value of different securities in different markets. If the Commission adopts a longer publishing period than is required in North America, it could put European markets at a competitive disadvantage in attracting investment funds relative to those other markets.

Second, the decision by regulators in the United States and Canada to require faster reporting is based on advances in information technology. In particular, reporting companies have the technology available to compile and publish financial reports within a shorter time frame than was possible when the current rules were adopted in the 1930s. As such, the regulators concluded that the shorter publishing period would not create undue reporting burdens for companies. The same is true for European companies.

Finally, the length of the reporting period can have profound effects on investors, given the effects of technological advances on the investment process. These advances in trading technology, together with the ability for markets to move more rapidly have increased the importance of making pricing information more immediate and transparent to investors who need the data to make appropriate value judgments more quickly. To the extent that critical pricing information is delayed in reaching investors, market efficiency is reduced.

With these factors in mind, it is the opinion of the EAC that the Commission should adopt the 60-day publishing requirements for annual reports, and 45-day requirements for quarterly reports, that it originally proposed.

 

Section 3.2.1. Quarterly financial reporting for equity issuers

The Committee is fully supportive of the EU's proposal to require companies within the Eurozone to publish financial reports quarterly. The EAC believes the "increased transparency for investors across borders throughout the European Union," together with an even playing field for all publicly traded companies in the Eurozone is the correct approach to enhance market efficiency.

 

Section 3.2.2. Only quarterly figures for small issuers of equities

We are concerned that the distinction the proposal makes for small and medium-sized enterprises (SMEs) could create more problems than it solves. By imposing less-stringent requirements on SMEs, the Commission will create an uneven playing field for equity issuers.

More importantly, however, the proposal to reduce reporting requirements for SMEs will create more risk for investors. By their very nature and, on occasion, lack of experience, SMEs typically pose the greatest risk to investors in terms of volatility and solvency. By not requiring SMEs to provide the type of critical financial and operational information required of larger companies, it becomes difficult for investors to make adequate valuation decisions. Ultimately, it could lead investors to shun securities of SMEs in favor of companies with more transparent financial information, thereby potentially making it harder for SMEs to raise capital in public trading markets. With these factors in mind, the Committee urges the Commission to impose similar reporting requirements on SMEs as it does on larger firms.

 

Section 3.2.3. Half-yearly reporting for debt security issuers whose shares are not admiteed to trading on a regulated market.

The Committee urges the Commission to require issuers of debt securities whose shares are not publicly traded to file quarterly financial reports in the same manner as companies whose shares are publicly traded. Debt securities, particularly securities convertible into equity shares, are affected by changes in financial condition and performance as much as securities representing equity stakes. As such, less-frequent reporting of financial information creates an uneven playing field for investors and issuers alike.

Such disparity in reporting requirements also can have an effect on the ability of debt investors to make decisions. For example, a change in a company's operating cash flow can have a significant impact not only on the value of the debt security, but also could potentially affect the ability of a company to meet interest payments and repay principal on the security. By requiring "debt-only" companies to report quarterly, it is less likely that investors in debt securities would be caught off guard.

Furthermore, a rule permitting less-frequent reporting could create perverse incentives for companies. In particular, the reduced reporting requirements could lead to a situation where companies choose to issue debt instead of raising equity capital. By doing so, it could lead companies to increase leverage and potentially increase the level of volatility for bondholders and shareholders alike.

 

Section 4 - Ongoing Information
4.1. Ad-hoc disclosure of price-sensitive information.

The Committee supports the Commission's plans to implement the rule proposed in 4.1, i.e., that issuers will have to disclose without delay information relating to amendments to company rules, statutes or instruments of incorporation.

 

4.2. Rights and treatment of security holders

The EAC is fully supportive of the proposal to permit shareholders to vote their shares in absentia, via proxy or by electronic means. It is a system that companies in North America have used without difficulties for a number of years and is one that will make corporate entities in the EU more democratic. Likewise, we strongly support the proposals to extend equal treatment of shareholders to those companies admitted for trading on regulated markets.

 

4.3. Disclosure of voting and capital structures

In general, the EAC supports the proposal for upgrading the transparency requirements for voting and capital structures. In particular, we believe that the proposed 5% thresholds for disclosure of major holdings will provide shareholders with relevant and important information relative to movements of shares that can influence a company's policies. We also support the Commission's proposal to extend the coverage of such disclosures to include other financial instruments convertible into equity ownership. Finally, we endorse the proposal to disclose information about shareholder agreements that might give one shareholder more voting rights than is evidenced by their economic ownership.

However, while the Committee approves of reducing time limits for disclosure of such activities, we urge the Commission to require both the acquirer/seller and the issuer to disclose the transactions on the same day the transactions occur instead of the five calendar days proposed for all parties. We make this suggestion out of a concern that such a delay in disclosing such activities to all shareholders would, in effect, delay shareholders receipt of this information for as many as eight trading days.

 

Section 5 - Disseminating and Filing Information

In general, the EAC is very supportive of the Commission's efforts to make dissemination of financial information easier and more accessible. The proposal to allow companies to choose which media to use as a "basic means for disseminating information" is a good step toward making critical financial information readily and easily accessible for investors. Likewise, the proposal to create central repositories in each Member State in "a language customary in the sphere of finance" is a good complement to the basic means for dissemination.

However, we are concerned that without guidance to Member State repositories as to how to make such information easy to use and accessible to investors across borders, the quality of the repository activities among individual Member States may vary greatly. Likewise, by granting each Member State the authority to determine what information is "necessary to protect investors or to ensure the smooth operation of the market" may lead to wide differences in interpretation. For example, one Member State may require more information than a neighboring Member State, thereby making it difficult for investors to make important value judgments between securities in each market.

To alleviate such potential disparities, the EAC encourages the Commission to establish standards that guide the competent authorities in each Member State. Such guidance might include minimum information requirements, such as detailed performance reports, statements of financial condition, statements of cash flows and supporting notes and disclosures to provide additional transparency.

 

Closing Remarks

 

The EAC appreciates the opportunity to express its views on the European Commission's proposal, Transparency Obligations for Issuers Whose Securities are Admitted to Trading on a Regulated Market. If you or your staff have questions or seek amplification of our views, please feel free to contact either James C. Allen, CFA, by phone at +1.434.951.5558 or by email at james.allen@cfainstitute.org.

 

Sincerely,

 

Dr. Luigi Gubitosi, CFA Chair European Advocacy Committee

James C. Allen, CFA Associate, Professional Standards & Advocac, AIMR

 

¹ The Association for Investment Management and Research is a global, non-profit organization of over 53,300 investment professionals from over 100 countries. Through its headquarters in the U.S. and 106 Member Societies and Member Chapters worldwide, AIMR provides global leadership in investment education, professional standards, and advocacy programs.