Will bond IR start to be more regulated?

The FSA has launched its a Discussion Paper on trading transparency in the UK secondary bond market which examines whether there is a need for the provision of greater pre- or post-trade price information in the secondary bond markets.

In launching the enquiry, Hector Sants of the FSA said the enquiry will ask whether there are any possible market failures caused by a lack of transparency in the UK and EU bond markets. The FSA also highlighted that the EU will start to examine this issue in 2006.

This enquiry begs the question of whether new requirements will be imposed on IRO’s for debt IR. If the secondary trading markets are to be more transparent, will new obligations for debt IR be imposed?

Will separate conference calls/ analyst meetings for debt holders become mandatory, will specific information for debt holders be required, and placed on debt IR sections of companies websites? Will credit rating agencies become mandatory disclosure points for price sensitive information?

Inevitably, one thinks of the potential for this to raise costs in managing a new set of tasks; on the other hand, if the Improvements in transparency proposed, if achievable, may consequently attract greater participation in a market by fostering confidence among existing and potential participants. To the extent that increased participation and activity reduces any liquidity premium demanded by market users, it should also reduce the cost of capital for issuers.

What does the Transparency Directive say on this issue? It imposes obligations on all issuers to disseminate their regulated information in a manner ensuring fast access to such information on a non-discriminatory basis throughout the EU. Note that the Transparency Directive differentiates between different types of issuers (for example, issuers of equity and issuers of exclusively debt securities).

The implications of this difference on this requirement will be determined when the Transparency Directive is implemented.

The FSA makes the point that it is seeking feedback from the entire market; issuers – both UK and overseas – may wish to look at this.

Just when you thought it was safe to go back in the water…

Hard on the heels of the judgement on Siebel, (see posting on September 8th), which lifted the threat of prosecution by the SEC for a selective briefing, the FSA has used its powers to prosecute the directors of a UK company for issuing misleading statements.

In May 2002, 2 directors of AIT, Carl Rigby and Gareth Bailey, issued a regulatory news announcement stating that both turnover and profit were in line with expectations. This statement relied on the inclusion of revenues from 3 contracts. The announcement was proved to be false and misleading because the contracts, according to the FSA, did not exist.

A subsequent announcement a month later acknowledged that the statement was no longer accurate, because one of the contracts has not been confirmed. A further announcement highlighted audit problems, which would mean a shortfall in profits. These announcements caused the share price to fall from just under £5 to 35p.

The prosecution was significant as the FSA’s first criminal action taken under s397 of the Financial Services and Markets Act 2000.

The case highlights the need for Directors to take manipulation of results even more seriously. In this instance, it seems the sales team booked fictitious customer orders to trigger their commission, but because the incentives were clawed back when the debts weren’t paid the team had to keep increasing the amount of fraudulent sales at each quarter end. By the time auditors were called in, fictitious sales accounted for 70 per cent of revenue.

Ultimately the people who paid the price – possibly up to 7 years jail - were the management team.

Siebel judgement good news for IRO's

The SEC’s second prosecution in 2004 of the US software business Siebel sent shock waves through many IRO’s of companies listed in the US, and subject to Regulation FD. These same IRO’s will be mightily relieved at the judgement of Judge George B. Daniels of the Southern District of New York on August 31, 2005 which dismissed the lawsuit.

This second prosecution was brought by the SEC, who alleged that Siebel Systems' CFO Kenneth Goldman, in 2 one-on-one’s with investors in 2003, provided price sensitive information that was subsequently used for trading by several of those in attendance. The SEC also charged Siebel Systems' Mark Hanson, in charge of investor relations, for violation of his company duty to maintain adequate disclosure controls to ensure compliance with Reg FD. All six causes of action were dismissed.

The case raises key issues of what – and is not – material. Judge Daniels concluded the four statements Mr. Goldman made at the investor meetings were not materially different from what had been previously disclosed by the company and did not alter the total mix of information available to the reasonable investor. Moreover, he said, "Regulation FD was never intended to be utilized in the manner attempted by the SEC under these circumstances." He also criticized the SEC's use of the regulation "in an overly aggressive manner."

The Judge confirmed that "Regulation FD does not require that corporate officials only utter verbatim statements that were previously publicly made." To demand otherwise would potentially mean that executives become overly cautious in communicating with analysts or selected investors especially in unrehearsed question-and-answer sessions, and responses to unsolicited inquiries.

Judge Daniels said, "The SEC has scrutinized, at an extremely heightened level, every particular word used in the statement, including the tense of verbs and the general syntax of each sentence. No support for such an approach can be found in Regulation FD itself, or in the Proposing and Adopting Releases. Such an approach places an unreasonable burden on a company's management and spokespersons to become linguistic experts, or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company's public statements."

The sixth claim by the SEC was that Siebel had maintained inadequate controls and procedures. This claim was also dismissed, since the information provided was not deemed to be price sensitive. This judgement therefore should not be read as meaning that companies do not have to maintain proper controls and procedures.

Does this mean that Reg FD is fundamentally flawed and can safely be ignored by IRO’s? Absolutely not, but it does mean that IRO’s can communicate without worrying that the SEC will be watching over their shoulders at every nuance of language.

Looking for more expertise among our membership in a pivotal year for XBRL.

Guest blogger Michelle Savage – Chair of the XBRL-US Adoption Working Group - writes an open letter to the membership of the XBRL community world wide.

This promises to be an exciting year for XBRL and the consortium; with the SEC Voluntary Filing Program kicking off earlier this year and the FFIEC global repository database becoming a reality in October, we are at a real turning point in the adoption of XBRL as a financial reporting platform. The work of the consortium to date has been instrumental in moving us closer to our goal of making XBRL the de facto standard for financial and business reporting.

But there is still much to be done and we need more input and more expertise from our membership. This is your opportunity to influence the growth of XBRL as a reporting standard and we need your help.

The mission of the XBRL-U.S. Adoption Working Group in 2006 will be to facilitate the adoption of external and internal reporting in XBRL, continue building awareness among regulators, the analyst community, public companies, software vendors and the government sector, and actively engage outside organizations that can help influence the adoption of XBRL. We have already taken the step of establishing a new position to focus on engaging more government agencies in XBRL. Leanne Travers, as the new Chair, Public Sector Adoption Working Group, reporting into the Adoption Working Group, plans to focus her energies on increasing government representation among our membership and identifying opportunities for demonstration projects that can help illustrate the importance of XBRL among this critical constituency. We will also develop a marketing and publicity program to ensure that the message of XBRL reaches all key audiences and to help boost attendance at our events. And we will focus on outreach to the analyst and lending communities to get more end-users aware of the benefits of XBRL.

And of course, we will continue to support the SEC Voluntary Filing Program, getting more public companies engaged and encouraging more participation from the SEC. We have a significant task ahead of us and I ask you as the members of XBRL-US to get engaged and become active members of the adoption group. We need your help to push XBRL forward and make it a reality in the near future. I am excited about the prospect of working with others in the consortium on what I believe will be a critical year for XBRL.