Mechanics of disclosure

Its all very well to decide what information is to be disclosed, however it is crucial to understand how it should be disclosed. In the UK this is strictly mandated.

As we have seen, the underlying principles are that all price sensitive information should be sent to all investors at the same time. Until 2002, this could only be achieved in one specific way. That was to send it to the stock exchange, through its DIPS service.

However, when the LSE announced its demutualisation, it triggered a series of changes, including the introduction of competition in the area of how price sensitive news should be disseminated.

Today there are 6 commercial firms who are ‘approved’ to handle the dissemination of announcements. Criteria including security, speed, simultaneous distribution, reach and fair commercial terms are mandated by the FSA, and the commercial firms are required to prove to the FSA with an independent audit how they have achieved them. The FSA then ‘names’ the commercial firms as Regulatory Information Services, and requires that price sensitive information be ‘sent to an RIS’.

Typically an RIS will have an online, internet based submission system. The user will log on using some form of secure password. This system will allow the user to upload a document (it is normally a Word document). Now the tricky bit. Because the media to whom it will be sent – Reuters, Bloomberg and others – are still reliant on systems that need a special plain text version of the news, the Word document has to be converted from Word to ascii. If there are tables of figures – as in a set of results for example – they can ‘wrap’ on to the next line.

Once converted properly, and reviewed by the RIS, it is pushed to ‘the market’, which means through organisations like Reuters, Bloomberg, Thomson, AFX and internet trading sites like Hemscott. Distribution to the FSA is also required.

Since the FSA requirements are that the news is distributed within 5 minutes of being received by the RIS, realistically this must be done automatically. So within 5 minutes of the announcement being sent to the RIS, it hits the market.

Other requirements. Under emerging rules, companies will also have the post the announcements to their own website.

What to disclose?

Deciding on whether something is price sensitive and needs to be disclosed through the regulatory channels lies at the heart of the IRO’s task. Unlike many other markets, the UK has no specific ‘materiality tests’ – there are no thresholds of the likely impact on the share price, and no case law that defines what a company should disclose.

Rather, the requirements to disclose are explained in a scattered series of documents. These tell IRO’s the structure against which they should decide whether to disclose information, but as in other other regimes, ultimately, the IRO is the final arbiter.

At the heart of the regulations are The Listing Rules, which defines in general terms what a company should disclose to the market. The Listing Rules are published and overseen by the Financial Services Authority, and include the the general obligation to disclose without delay where there have been “major new developments which may be price sensitive to its own shares” (my italics) .

To help IRO’s decide whether something is price sensitive, the FSA publishes its ‘PSI Guide’, which notes that factors influencing the price sensitivity of an item of information will vary widely across companies, and include the company’s size, developments in the recent past, activity in the sector etc. It also notes that a percentage movement in profits may be more significant for a company with a larger market cap.