The Swedish Financial Instruments Trading Act was amended on 1 February 2016 in order to implement changes introduced in the updated EU Transparency Directive, the majority of which are related to the obligation to notify major holdings in listed companies (so-called "flagging"). Additionally, the amendments in the Directive have required that amendments be made to the Swedish Securities Market Act, most importantly the abolition of the statutory requirement to publish interim management statements or Q1 and Q3 interim reports.
Revised flagging rules
Following implementation of the amended Directive, the Swedish flagging rules have been expanded in such a way that they now not only apply to holdings of shares, depository receipts and financial instruments that provide an entitlement to acquire already issued shares, but also to holdings of financial instruments with similar economic effect to financial instruments that provide an entitlement to acquire already issued shares. The new category of financial instruments should be interpreted broadly and may include e.g. options, futures, swaps, forward rate agreements, stock lending arrangements, exchangeable bonds, contracts for differences and any other agreements with similar economic effect, irrespective of whether they are settled physically or in cash. The definition of the new category of financial instruments is intentionally broad in order to include any new similar instruments developed by the financial market in the future. However, since the extended flagging obligations only apply to financial instruments that relate to shares that are already issued, convertible bonds convertible into new shares and warrants to subscribe for new shares are not covered by the rules. The European Securities and Markets Authority (ESMA) has published an indicative list of financial instruments that are subject to flagging requirements (link to list), and may publish updates to this list when deemed necessary.
The expanded scope of the flagging obligations has introduced a new calculation method in respect of holdings of financial instruments that are exclusively settled in cash. Holdings of financial instruments that are exclusively settled in cash must be calculated daily on a delta-adjusted basis, using a generally accepted standard pricing model. Such pricing model must be sufficiently robust to take into account elements that are relevant to the valuation of the instrument, including e.g. the interest rate, dividend payments, volatility, time to maturity, and the price of the underlying share. Holders of financial instruments that are exclusively settled in cash should ensure that their reporting systems are able to monitor changes in the delta values of the relevant financial instruments with sufficient precision.
The flagging thresholds remain unchanged at 5, 10, 15, 20, 25, 30, 50, 66⅔ or 90 percent of the shares or voting rights. However, the new rules provide for an obligation to submit a breakdown of the holdings between shares and depository receipts on the one hand and financial instruments on the other hand, and also between the two categories of financial instruments as well as the extent to which such financial instruments are settled physically or in cash.
The new rules provide for an extended time limit for flagging. The time limit has been extended from one trading day to three trading days from the event that triggered the flagging obligation. This relaxation has been justified by the increased complexity of the flagging rules as well as the tougher sanctions imposed for non-compliance with the flagging rules.
The pecuniary sanctions imposed for non-compliance with the flagging obligations have become significantly more severe following implementation of the amended Directive. In summary, the revised rules provide for the following administrative pecuniary sanctions:
- In the case of a legal entity failing to perform its flagging obligation: up to the higher of (i) EUR 10 million, (ii) 5% of the annual turnover, and (iii) twice the amount of the profits gained or losses avoided because of the breach.
- In the case of a natural person failing to perform its flagging obligation: up to the higher of (i) EUR 2 million, and (ii) twice the amount of the profits gained or losses avoided because of the breach.
In addition, the target group for sanctions has been extended to include board members and the managing director of the legal entity with a flagging obligation. However, such sanctions can only be imposed on these members of management if there has been a serious breach which has been caused by the individual intentionally or through gross negligence. The maximum sanctions that may be imposed on members of management correspond to those that apply to natural persons as set out above.
The Swedish Financial Supervisory Authority (SFSA) will publish guidelines regarding how the range of pecuniary sanctions will be applied in various situations of non-compliance with the flagging obligations.
Relaxed rules for interim reporting
The statutory requirement for listed companies to publish interim management statements or interim quarterly reports (Q1 and Q3 interim reports) has been abolished. In the short term, this change may have limited practical consequences, the reason being that the rule books of the Swedish regulated markets (e.g. Nasdaq Stockholm) still state that issuers must publish either interim management statements or interim reports on a quarterly basis. However, the rule books of the Swedish regulated markets have been amended to provide some flexibility as regards the contents of interim management statements or interim reports in respect of the first and third quarters.