Publication
Horizon Scanning: Investigations and Enforcement
In this horizon scan, we focus on key developments affecting companies operating in the UK, including in light of the recent change in UK government.
Global | Publication | May 27, 2016
Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.
On May 26, 2016 the Financial Conduct Authority (FCA) published a note on its website on its approach to closed periods and preliminary results under the Market Abuse Regulation (MAR). Article 19(11) of MAR prohibits dealings by persons discharging managerial responsibilities in “closed periods” except in certain circumstances.
In the UK issuers often announce their preliminary results ahead of the final year-end results and the current UK regime ends the close period when the preliminary results are publicly announced, so the dealing prohibition then ends. There has been uncertainty as to whether under MAR, in force from July 3, 2016, issuers that announce preliminary results need to impose closed periods either before the preliminary results, the year-end report, or both. The FCA notes that this is still being discussed at a European level and the FCA will provide further clarification in due course. In the meantime, pending clarification from the European Commission and the European Securities and Markets Authority, the FCA will continue to view the 30 day closed period under MAR as being immediately before the preliminary results are announced provided the preliminary announcement contains all inside information expected to be included in the year-end report.
(FCA, Closed periods and preliminary results under MAR, 26.05.2016)
On May 25, 2016, the Financial Conduct Authority (FCA) published Primary Market Bulletin No. 15, a short special edition focussing mainly on how issuers are expected to file persons discharging managerial responsibilities (PDMR) notifications and notifications for delayed disclosure of inside information with the FCA under the Market Abuse Regulation (MAR).
The Primary Market Bulletin provides as follows:
In the Primary Market Bulletin the FCA also point out that it plans to work closely with market operators to monitor the application of MAR and compliance with it. For issuers with financial instruments admitted to trading on multilateral trading facilities, the FCA intends to collaborate with market operators on compliance issues and real time market monitoring.
On May 25, 2016 the Financial Reporting Council (FRC) published a set of responses to frequently asked questions to assist directors in their consideration of the Guidelines on Alternative Performance Measures (Guidelines) published by the European Securities and Markets Authority (ESMA) in June 2015. ESMA aims to promote the usefulness and transparency of alternative performance measures (APMs) presented to investors through the Guidelines which will apply to APMs presented on or after July 3, 2016 in prospectuses and regulated information. That includes APMs presented in periodic reports such as the narrative sections of the annual report, including the strategic report, interim management reports and half-yearly financial reports and preliminary announcements, as well as RNS announcements and other ad hoc disclosure such as press releases.
The frequently asked questions in the document comprise the following:
(FRC, ESMA Guidelines on Alternative Performance Measures – Frequently Asked Questions, 25.05.2016)
On May 23, 2016 the Financial Reporting Council (FRC) issued a feedback statement on the discussion paper it published in October 2015 on UK board succession planning. That discussion paper had sought views on issues surrounding board succession for both executive and non-executive directors.
The discussion paper was divided into six sections which the FRC had identified as important in relation to succession planning, and responses in relation to each of those sections include the following:
As part of the FRC’s on-going Culture Coalition Project, the FRC will consider providing nomination committee guidance as part of its revision of its Guidance on Board Effectiveness last published in 2011. For the current reporting season, the FRC will review and analyse nomination committee disclosures (including board evaluation reporting for the FTSE 350) and comment on its findings in its 2016 “Developments in Corporate Governance and Stewardship” report.
(FRC, Feedback Statement: UK board succession planning discussion paper, 23.05.16)
On May 20, 2016 the Investment Association wrote to the chairmen of FTSE companies to highlight its members’ concerns about the number of instances where companies have made significant changes to their profits expectations and/or have reduced the dividend policy following the appointment of new management.
The letter notes that in the last year there have been many examples of companies where new management has been appointed and within months the value of the assets being written down and future profit expectations are scaled back significantly. In many cases these impairments have impacted on the capital strength of the balance sheet and have led to a dividend cut. Investors believe these actions highlight insufficient oversight on the part of independent directors and the audit committee and it points out that directors should be assessing the likely future profitability of the business and the valuation of its assets on an on-going basis. If, on the appointment of new management, the prospects of the business are then presented as being fundamentally different, it raises questions about the board’s oversight of the previous management and why these issues were not addressed earlier.
The letter notes that Investment Association members have asked IVIS to highlight on an “Amber Top” the re-election of the non-executive directors of any companies where this situation arises following the appointment of new management and this policy will come into effect for AGMs after August 1, 2016.
ICSA’s Governance Institute has been looking at the practice of taking board and committee minutes and is aware that there is a variety of practice both across sectors and the industry as a whole. It notes that, unlike company general meetings, board meetings are almost entirely unregulated by the Companies Act 2006 and it is aware that as well as constituting a long-term internal record of board and committee meetings, minutes are increasingly being seen to fulfil additional functions. ICSA wants to update its guidance on good practice to reflect the reality of modern market practice on a cross-sectorial basis and so has issued this consultation paper.
The consultation paper considers the following issues:
ICSA has asked for comments by June 24, 2016. It will review those comments and then publish revised guidance in due course.
(ICSA Consultation – The practice of minuting meetings, 05.2016)
On May 17, 2016, the European Commission adopted a Delegated Regulation which supplements the Market Abuse Regulation (MAR) with regard to regulatory technical standards (RTS) for the appropriate arrangements, systems and procedures for disclosing market participants conducting market soundings. Article 11(4) of MAR states that when a disclosing market participant discloses inside information to a person receiving the market sounding in the course of a market sounding in accordance with the conditions in Articles 11(3) and (5), this should be deemed to have been made in the normal course of the exercise of a person’s employment, profession or duty and so not constitute market abuse. Article 11(9) of MAR requires the European Securities and Markets Authority (ESMA) to develop draft RTS to determine appropriate arrangements, procedures and record keeping requirements so that the framework for market soundings can be effectively managed and controlled.
The draft RTS were submitted to the European Commission in September 2015 and the delegated Regulation was adopted by the European Commission on May 17, 2016. It provides for the following:
The Delegated Regulation is to apply from July 3, 2016 and it will enter into force on the 20th day following its publication in the Official Journal.
(European Commission, Delegated Regulation C/(2016) 2859 final, 17.05.2016)
On May 24, 2016 the European Commission published a Delegated Regulation under MiFID II with regard to Regulatory Technical Standards (RTS) for the admission of financial instruments to trading on regulated markets. The draft RTS were submitted to the European Commission by the European Securities and Markets Authority (ESMA) in September 2015 and the corporate aspects of the text of the Delegated Regulation remain in substantially the same form as the text proposed by ESMA in September 2015.
The Delegated Regulation should enter into force on the 20th day after its publication in the Official Journal and will apply from January 3, 2017.
On May 13, 2016, the Financial Stability Board (FSB) published a Phase I Report prepared for it by the Task Force on Climate-Related Financial Disclosures that was set up in December 2015 by the FSB to develop recommendations for climate-related disclosures by companies.
The G20 asked the FSB in April 2015 to consider risks related to climate change, noting that while in most G20 jurisdictions there is a legal obligation to disclose any material risks in financial reports (which includes climate-related risks), the lack of a standardised framework for disclosing climate-related risks makes it difficult for companies to determine what information should be included in their annual reports and other financial filings and how it should be presented.
The Phase I Report sets out the scope and high-level objectives for the proposed work as well as a set of fundamental principles for disclosures on climate-related financial risk and risk management. These are as follows:
These principles are to underpin the Task Force’s Phase II recommendations for enhancing climate-related disclosures and the recommendations that are to be developed will be for issuers of public securities, listed companies and key financial-sector participants, although it is expected that the recommendations will be capable of broader application. The aim is for a final report which sets out specific recommendations for voluntary disclosure principles and good practice to be delivered by the end of 2016.
(FSB, Phase I Report of the Task Force on Climate-related Financial Disclosures, 31.03.2016)
On May 23, 2016 the Modern Slavery (Transparency and Supply Chains) Bill had its First Reading in the House of Lords. The Bill proposes amendments to section 54 Modern Slavery Act 2015, which requires commercial organisations to prepare a slavery and human trafficking statement for each financial year.
The Bill extends this requirement to “public bodies” as defined in a new section 54(2A) to be inserted in section 54. The Bill also includes a new section 54(6A) which provides that commercial organisations and public bodies must include the slavery and human trafficking statement in their annual report and accounts, together with a requirement in new section 54(10A) and (10B) that the Secretary of State must publish a list of all commercial organisations required to publish a slavery and human trafficking statement, with that list being published in a place and format that is easily accessible and with the commercial organisations in the list being categorised according to sector. In addition, the Bill proposes amending Regulation 57 of the Public Contracts Regulations 2015 to provide that a contracting authority must exclude an economic operator from participating in a procurement procedure where they have established that the economic operator has failed to produce a slavery and human trafficking statement under section 54 Modern Slavery Act when required to do so under that Act.
The Second Reading of the Bill has not yet been scheduled.
(House of Lords, Modern Slavery (Transparency and Supply Chains) Bill (HL), 23.05.2016)
Publication
In this horizon scan, we focus on key developments affecting companies operating in the UK, including in light of the recent change in UK government.
Publication
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