Happy New Year. In this issue, we look at new guidance from ESMA on dealings in securities and investment recommendations under the Market Abuse Regulation. We also examine the new requirement for public interest entities to prepare a non-financial information statement.
ESMA ISSUES UPDATED Q&A ON MAR
Late last year, the European Securities and Markets Authority ("ESMA") issued an updated Q&A on the Market Abuse Regulation ("MAR"). The updated Q&A can be found here.
The new questions and answers relate to dealings by managers and investment recommendations.
Dealings by managers
Article 19 of MAR states that certain people must notify an issuer and the Financial Conduct Authority (the "FCA") when they deal in their issuer's shares. These are persons who discharge managerial responsibilities at the issuer ("PDMRs") and persons closely associated with them (their "PCAs").
However, in the UK, MAR does not require a person to make these notifications until all of that person's transactions in a calendar year reach a threshold of 5,000.
There has been some discussion about whether it is necessary to aggregate a PDMR's transactions in a given year with transactions by his PCAs when working out whether the threshold has been met. So, for example, if a PDMR's dealings in a given year come to 4,000 and her spouse's amount to 2,000, are they both required to notify the issuer and the FCA? MAR is not clear on this point.
ESMA has confirmed that transactions by PDMRs and PCAs should not be aggregated. So, in our example above, MAR would not require the PDMR or the PCA to notify the issuer or the FCA.
This may be a surprise to many. To date, the common approach seems to have been that transactions by PDMRs and their PCAs should be taken together when reckoning the threshold. This is a cautious approach, but there is logic to it. PCAs include spouses, dependent children, co-habiting relatives and connected companies. It is fair to assume that their dealings may be related to their PDMRs' dealings.
In practice, this may not make much difference in the UK.
Most issuers have adopted securities dealing policies that require PDMRs and (where possible) PCAs to notify them of all dealings, and not merely those above a threshold. We anticipate that this will continue to be the case going forward.
This has been another area of focus. An investment recommendation ("IR") is any information recommending or suggesting an investment strategy. Article 20 of MAR requires IRs to be objectively presented and any conflicts of interest to be disclosed.
Further regulations require IRs to disclose the name and job title of those involved in producing the IR and to indicate all substantially material sources of information. Businesses have therefore been keen to understand what kinds of communication will and will not constitute an IR.
ESMA has confirmed the following in its updated Q&A:
- Communications containing purely factual information are not IRs, because they do not recommend or suggest an investment strategy. This is a useful confirmation for institutions that regularly put out factual releases on specific financial instruments.
- A communication that simply refers to a previously published IR, but which does not contain any new opinions or valuations, will not itself constitute a new IR. However, it will still need to state the date and time on which the original IR was disseminated.
- Communications relating to derivatives traded outside a venue subject to MAR are not IRs unless the derivatives' price or value depends on, or affects the price or value of, a financial instrument that is subject to MAR. Firms must make their own assessment on a case by case basis.
The Q&A also now confirm the following:
- If a PDMR enters into a service contract and is entitled to receive shares as remuneration if certain conditions are met, the PDMR needs to make a notification only when those conditions are met, and not when the PDMR enters into the service contract.
- How to calculate the price of shares which are donated, given or inherited.
NEW NON-FINANCIAL REPORTING REGULATIONS
New regulations have now been published that will require large, public-interest entities to include details of a variety of social and compliance-related matters in their annual strategic report. The requirement will apply to financial years beginning on or after 1 January 2016.
Who is subject to the requirement?
The new regime will apply to all traded companies. These are companies whose transferable securities are admitted to a regulated market, such as the LSE Main Market. It will also apply to banking companies, authorised insurance companies and companies carrying on insurance market activities.
However, a company will be exempt from the regime if (broadly) it was small or medium-sized for accounting purposes, or if it or the group headed by it had 500 or fewer employees, during the financial year in question.
What must the report contain?
A new section 414CB of the Companies Act 2006 sets out the contents of the so-called "non-financial information statement". This includes information relating to environmental matters, the company's employees, social matters, respect for human rights, and anti-corruption and anti-bribery matters.
However, the company need include this information only to the extent necessary to understand the company's development, performance and position and the impact of its activity. Conversely, the legislation states that these matters are to be included "as a minimum", suggesting that a company may report on other matters if it feels it is necessary.
Finally, the statement must also contain a description of the company's business model and the non-financial key performance indicators relevant to its business.
Most large organisations will by now have implemented detailed policies to ensure compliance with the Bribery Act 2010, the Modern Slavery Act 2015 and other compliance-related legislation. For these businesses, preparing their annual nonfinancial information statement may well be a simple exercise of collating information (whether or not published) from existing sources.
For other businesses whose compliance functions are still young or in the course of being built, the new regime may prove more of a challenge. In particular, the requirement to describe the company's policies means that businesses currently lacking an ABC or human rights policy should now work towards producing one.