Convergence: ending the differences between US and EU IR?

A consistent theme of this blog has been the wide variation of regulation between countries where a company may be listed or registered. This in turn places burdens on the IR professional, making the compliance task ever more difficult. Last week, we talked about the variations between EU regimes.

And this week, the SEC has taken another step towards creating a coherent regime of regulation, consistent with those of other countries. In doing so, it recognises a changing international environment.

The trading environment is unrecognisable from only 5 years ago, with exchange mergers, the use of derivatives on a cross border basis, and the rise and rise of dark pools of liquidity, from the development of new forms of trading venues such as ATSs, ECNs and MTFs.

At the same time, global markets and this increased cross-border access offer benefits for investors, including more investment choice, cheaper trading, faster settlement and wider access to decision making information.

However to leverage this new world requires regulators to ensure greater international cooperation in creating consistent and strengthened investor protection, and easing the burden of compliance.

Historically, responsibility for oversight – whether by a stock exchange or a securities regulator - has been achieved on a national basis.

So to this week’s announcement by the SEC that they will seek mutual recognition for their regulatory regimes in other countries. The Commission says it aims to explore agreements with their foreign regulatory counterparts, notably the EU, and to create a formal process for common rule making.

And perhaps most interesting is the prospect of reform to the rule governing the process by which U.S. investors have access to foreign broker-dealers. (Think of those “not for US investors” messages).

A final thought. The practice of investor relations in the US is markedly different than that of Europe, with much greater focus on compliance, less engagement by the IRO in corporate actions, and greater retail investor interaction. Will a regulatory platform based around common principles of compliance with things like disclosure, change this distinction?

Disclosure regime change – again.

Here we go again.

Just when you thought that disclosure rules – and their implications for listed companies – were settling down, along comes another review.

Following its meeting of 5 March, the European Securities Markets Expert Group (ESME) released a report on “competent authority pertaining to issuers publication of regulated information”.

The report analyses the different approach to EU issuers’ disclosure obligations contained in the Market Abuse Directive, the Prospectus Directive and the Transparency Directive.

It notes that as a result of a differing implementation of regulations in different EU countries: “…a particular issuer becomes subject to more than one set of rules and/or to supervision from more than one supervisory authority in respect of essentially one and the same disclosure obligation.”

In other words: if your equity is listed in another EU regime different – and potential contradictory - rules may apply. It has long been a concern of investor relations professionals as to how to reconcile these competing sets of rules.

ESME calls for a mutual recognition regime to all obligations imposed on issuers prepared according to the requirements of the member state where the issuer has its registered office.

This would be a step further towards one of the original objectives of the European legislation – making it easier for issuers to raise capital across the EU without significant additional regulatory burdens.

However, to do this, ESME recommends an alignment of MAD, TOD and PD so that one single regime applies to all of them.

This is a first salvo in the upcoming review of bits of the FSAP. The review of the Market Abuse Directive is scheduled in 2008 and the Commission will release a draft report in autumn this year. The review of MAD has assumed a particular importance given the continuing financial market turmoil. The Transparency Directive will be subjected to a complete review by mid-2009.

So watch this space as the battle lines on still further revisions to the disclosure rules are drawn.

Explaining rather complying can be good business for both investors and issuers

Studies from time to time show the levels at which FTSE 350 companies “explain” rather than “comply”. Frequently they show upwards of 40% of companies failing to abide by the spirit of the Combined Code.

So what to make of 2 recent events.

First, the Marks and Spencer decision to to promote its chief executive to executive chairman, extending his tenure by two years. Second an ABI study indicating that companies with the best corporate governance levels in the FTSE All-Share have produced returns 18 pct higher than those with poor governance,

The M&S move runs contrary to the UK’s Combined Code that recommends a chief executive should not move to become chairman of the same company. The move prompted the Association of British Insurers (ABI) to issue an "amber-top" warning to members saying M&S needed to provide a "convincing explanation".

And this comes days after the ABI itself issued research showingthat companies that lose support of their institutional shareholders over boardroom structure and pay perform less well than those whose corporate governance practices are supported by investors.

The study suggests that companies with the top corporate governance records produce returns 18% higher than those with poor governance over a four-year period.

The ABI noted that "Our members' interest in governance has always been driven by their desire to generate value for policyholders over time. The results confirm our belief that good governance produces better returns with less volatility - something that long-term savers need.”

Nonetheless Marks and Spencer’s institutional investors appear to differ in their views with some accepting the breaking of normal standards if it means Rose, the man they credit with overseeing an dramatic turnaround in the last three years, stays at the business and succession speculation dies off. But others – including the normally silent L&G – have concerns.

So it appears that compliance with the (to date) voluntary Combined Code is good business for both issuers and investors – but there are exceptions that prove the rule. Which itself argues that the Code’s “comply or explain” mechanism is far superior to the hard coded rules of SOX. Provided of course the “explanation” is well done.