The changing role of exchanges in news dissemination

Stock exchanges in Europe are facing a number of challenges, from consolidation to questions regarding their supervisory role.

An unsung area of change has been in the role they play in distributing insider data. Under the Transparency Obligations Directive, it likely that companies will now have a choice as to whether to send the news to their Stock Exchange – or not.

At the moment, stock exchanges across Europe provide news dissemination services for their listed companies. And in some cases, these are mandatory – meaning that companies are obliged to use the service. There are often no overt fees payable for this service, although the costs of running it are often recovered through the listing fees.

Also, there is frequently a process by which the exchange receives a copy of an announcement in advance of general dissemination, so that the exchange can decide whether a suspension of the stock’s trading is appropriate. Under some models, the issuer waits 30 minutes and then sends the announcement; under other models, the issuer waits until the exchange clears the announcement, which can then be distributed widely.

This is all highly likely to change under TOD.

First, as a principle, the issuer will be responsible for the content of the announcement, and the results.
Second, there will be no need to send the announcement to the exchange, either for ‘pre-approval’ or for dissemination. Issuers will be able to choose to send the announcement out themselves to the designated media, and in the way required by the regulators, or to use a service provider.

Costs. What will happen to the costs of this process? Well, several effects.

There will be a fee for the service, where it has previously appeared to be ‘free’. Exchanges will have to decide whether to offer a commercial dissemination service, in competition with traditional news disseminators.

It is likely also to change their income in other ways. Exchanges provide the news (along with pricing data) to financial news services such as Reuters, Bloomberg and others. They often charge a fee for doing so. This is likely to change, because, since they can no longer guarantee to provide 100% of the news, it will be less valuable to the news organisations.

Net net, expect your exchange to contact you with a proposal on dissemination of news. And remember that you will have a choice.

Corporate reporting and financial disclosure used to be simple and largely a matter of best practice. New regulations, new audiences and new technique

One of the major challenges for businesses seeking to raise capital on a pan European basis has been new regulations on continuous disclosure and on financial reporting. These will have a substantial effect on those responsible for investor communications.

The changes to the way listed companies will report to their shareholders and to the broader investor market, are being driven by regulators responding to events, and by the perceived new audiences. The new regulations – which are having major practical impacts on those responsible for investor communication – are coming out of the Financial Services Action Plan, aimed at creating an integrated market for financial services across the EU.
Among the key steps that regulators are taking, is the introduction of a common approach to financial reporting. With the new IFRS having been implemented, concerns exist about volatility and confusion in the first results announcements from companies. Two constituencies are instrumental in ensuring as smooth a transition to IFRS as possible: the companies themselves, and the analysts who influence market sentiment.

The latter do not appear to be as prepared for the changes as might be expected, according to a recent survey from Fallon Stewart a research consultancy. Few analysts have changed their models, despite increased focus on cash flows, and even fewer had received guidance from companies on the impact of IFRS. The potential impact is for large variations in earnings forecasts, through changes to underlying valuation metrics used in financial forecasting. This reporting season will be one to watch.

It will also be worth watching the varying implementations of MAD (the Market Abuse Directive), aimed at fostering a common EU approach for preventing and detecting financial malpractices such as insider dealing and suspicious transactions. They are already having some very practical effects on corporate reporting. In the UK, the FSA won rare praise for its implementation proposals, which retain many of the best features of the existing regime, whilst adopting the EU market abuse definitions. For IRO’s, things to be aware of include the creation of insider lists, and the reporting of ‘managers’ dealings, in the same fashion as Directors’ Dealings are now reported.

Meanwhile in Germany, the first country to transpose the Market Abuse Directive into national law, there has been a spate of annual results figures released prematurely over the past two months, as companies worried that failure to release would land them in trouble with the regulator.

Another Brussels inspired change will be in the area of ongoing disclosure through the Transparency Obligations Directive. For IRO’s the changes centre on 2 areas; firstly, the need to disseminate price sensitive news in a manner which is fast, electronic, and pan European. If they choose to use an ‘Operator’ (a professional distribution company) the Operators will have to be competitive. No more monopolies.

Another change being proposed is the creation of a central storage mechanism, for the filing of annual and interim reports, prospectuses, as well as price sensitive news. This information would be available to all investors, helping achieve a key objective of TOD in improving access for retail as well as institutional investors, but creating extra responsibilities for issuers. Inevitably dubbed an EDGAR for Europe, the aim is to create databases, probably to be run by regulators at national level, which will then be networked together, providing the pan European view.

And finally the EU may be about to get tough on corporate governance regulations. At the moment, the regulation of corporate governance in Europe is generally on a "comply or explain" basis rather than by legislation. There is no plan to impose an EU-wide governance code because of differing national business law and culture.

Yet most countries are implementing reforms that tackle similar issues: increasing checks on executives, raising auditing standards, and improving disclosure.

Meanwhile, an EU corporate governance forum has been set up, that met for the first time in January. It will examine best practice and encourage convergence. The European Commission has issued recommendations reinforcing the role of independent non-executives and urging disclosure of individual director's remuneration.

And the pressure to communicate well is not just coming from regulators – it is also coming from investors across the globe, who are stepping up their insistence that companies practice good governance.

Overall, the level of progress probably isn’t as high, but momentum is growing at a fast pace.

Part of the challenge involves overcoming behaviors that have existed for centuries. There also is some resistance to adopting governance practices begun in the United States, even though many of these practices are being recognised for their value, as well as attacked for their cost.

Another part of the challenge comes in being able to create unified governance standards across countries where attitudes and behaviour vary and have been in place for a long time. This is certainly the case in Europe where the European Commission is trying to build sets of standards, through its Governance Forum.

Clearly, activist investors and investment management firms are at work in nations and regions seeking to establish what they view as better corporate governance. Many are well organised and well funded, able to forge change.

In moving toward change, a number of organisations and institutional investors are tracking such U.S. activists as the California Public Employees’ Retirement System and adopting some pieces from Sarbanes-Oxley.

Calpers formed an alliance several years ago with Hermes Investment Management Ltd, in London to bring its governance style to the United Kingdom. One of the alliance’s programs is to name the best and worst performing companies. Recently, an official of the European Commission suggested identifying a list of poor performers similar to Calpers’ Focus list.

However in the meantime, the costs of compliance with the new legislation and with the new best practices identified by activist investors, continue to rise. Certainly many companies registered and listed in the US have been reported as reconsidering their US programmes.

Which is why regulators on both sides of the Atlantic are increasingly looking at ‘super equivalence’. They recognise the danger of creating overlapping and inconsistent rules between the US and the EU. As examples, EU auditors now have to register with the PCAOB, EU companies comply with Sarbanes Oxley disclosure obligations, including the requirement to prepare accounts in accordance with US GAAP.

This extra territorial regulation can also work the other way round. US financial institutions will have to prepare accounts in IAS immediately, unless they are proved to be subject to equivalent supervision in the US. And all US companies listed in Europe will have produce IAS accounts from 2007, unless there is convergence of US GAAP and IAS.

The authorities have together launched the Financial Markets Regulatory Dialogue, which has helped to defuse a number of conflicts. We have seen US regulators in London extending the deadline for European companies to comply with Sarbanes Oxley Section 404 on internal controls, and promising to consider the need for European companies to produce US GAAP accounts.

And this dialogue is becoming not just retrospective but forward looking as well. The current agenda includes treatment of special purpose vehicles and credit rating agencies, disclosure by institutional investors and of course US GAAP/ IAS convergence.

Without dialogue between the US and EU financial services regulators, serious barriers between EU and US could arise.