Has the FSA made the disclosure task tougher?

The recent FSA actions on delayed disclosure have cut to the heart of what IR should be able to do for companies. It highlights the raw dilemma facing companies as they suffer from the - highly unpredicatable - business climate. A renewed FSA focus on the disclosure of inside information is the last thing Directors, IR managers, and their advisers need.

The FSA disclosure rules are themselves not prescriptive. Much is left to the judgement of companies and their advisors – and largely we like it that way. Light touch rather than bright lines. And available help – as per the FSA’s UKLA List! – carries a warning that the contents do NOT constitute FSA Guidance. So knowing the definition and making a judgment on what constitutes PSI are two different matters. What kind of judgements must be made?

Timing. What did the company know and when ? Could they have disclosed the bad news more quickly? And why didn’t the board – and the IR team - hear about the problems sooner? Too fast risks providing inaccurate information, and too slow risks FSA action.

‘Estimating’ the likely market reaction. By definition IR teams are not market traders. And as always, the evaluation of the degrees to which news is positive or negative, is a function of an efficient market. Would losing a factory or having a minor product recall constitute a price sensitive event if they were insured losses? Is one positive event a trade off against another, negative, event?

In this instance, it is easy – with hindsight - to paint an 18% drop in share price as proof that this was price sensitive and that they should have known better, but the share price over the following month (during which there was no significant newsflow) recovered to the same level it was at previously and shows flat performance against the market and its sector.

Isn’t the vital test that of knowing whether the company will make the markets’ forecast, rather a fall/rise on a given day? Is a single piece of news on its own likely to serve to confuse or inform the market? Are we expecting the market as a whole – professionals and retail – to build a mosaic of a company’s news? Indeed in some markets, the ‘mosaic’ rule exists to avoid precisely that.

A key test in many markets of whether a disclosure fault was made lies in examining prior practice. If the company has systematically informed the market of individual contracts, or other news, then departure from that habit is not good practice. In this case it seems that reporting won contracts was not its practice. Consequently to have told the market only the ‘negative news’ would have been to mislead the market, who would potentially have marked down its forecasts.

A feature of the Wolfson judgement was its emphasis on the advice received from their IR advisory firm, and delaying seeking input from their corporate broker. It leads to a couple of observations; if as experienced an advisor as Wolfson’s is unable accurately to identify inside information, there must be something wrong with the guidance available. Hence are we heading inexorably towards a situation where advice must be received from a registered advisor?

Was the FSA “proportionate”? There is no implication from any of this that management attempted to make use of a false market for insider trading activities. In that context, this was a large fine for 16 days’ inadvertent non-disclosure, especially given that the share price recovered ground so quickly.

A consistent theme of the FSA ‘guidance’ is that one size does not fit all. Each company, says the FSA, must make its mind up as to its own circumstances. Which is fine, until combined with a 20/20 retrospective view. So, at the end, this may be more a case of poor communications than market abuse.