Publication of Consultation Paper CP17/5 follows a Discussion Paper on the availability of information in the UK IPO process published by the FCA in April 2016,1 and that Discussion Paper resulted from a market study into investment and corporate banking launched by the FCA in May 2015. In its April 2016 Interim Report on that market study2 the FCA noted its concerns about the market practice of imposing a “blackout” period (typically 14 days) between the publication of research by syndicate banks (connected research) and the circulation of a pathfinder prospectus. The FCA was concerned that the lack of public availability of the prospectus until very late in the IPO process, combined with a lack of access to the issuer’s management resulting in unconnected analysts (from independent research providers and non-syndicate banks) having little or no information on which to produce research, means that the diversity and independence of information available to investors during the investor education period is reduced.
The Discussion Paper sought views on possible reform of the IPO process in light of these concerns and the FCA notes in CP17/5 that feedback on the Discussion Paper shows that there is strong support for reforming the availability and quality of information in the IPO process, with it being recognised that such reforms would further enhance the effectiveness of the UK’s primary markets as a place for raising capital. As a result, the FCA has set out a number of policy measures in CP17/5, comprising proposed FCA Handbook rules and FCA Handbook guidance.
Proposed FCA Handbook rules on availability of information
The proposed new rules (set out in Appendix 1 to CP17/5) would be included in the Conduct of Business sourcebook (COBs) and they would apply to any investment bank that has agreed to carry on regulated activities for an issuer, including underwriting or placing, in connection with an IPO on a regulated market of shares (or certificates representing specified securities that confer share rights) for which a prospectus is required, and is intending to publish connected research on the issuer or the relevant securities before admission to trading. The new rules would provide as follows:
- Investment banks must give a range of unconnected analysts the opportunity either to join the bank’s connected analysts in any communication with the issuer’s management or to communicate with that management team in a way that: (i) is reasonably appropriate to enable the unconnected analysts to receive information from and make enquiries of the management so that they can form a substantiated opinion about the issuer or the relevant securities; and (ii) is completed or substantially completed before any connected research is published. If the investment bank does not do this, it must prevent its own connected analysts from communicating with the issuer and its external advisers.
- In selecting the range of unconnected analysts to communicate with the issuer’s management, the investment bank must select a range that, in its reasonable opinion, has a reasonable prospect of enabling investors to make a better informed assessment of the value (present or future) of the relevant securities than if they only had connected research available to them. Such unconnected analysts must be engaged by the investment bank on reasonable terms, though restricting the geographical dissemination of research by an unconnected analyst is recognised as being reasonable.
- If an investment bank provides a range of unconnected analysts with the opportunity to communicate with the issuer’s management before any connected research is published, the investment bank will be able to publish connected research one day after publication of the prospectus or registration document. If the investment bank does not do this, it cannot publish connected research until seven days after the publication of the prospectus or registration document.
The FCA believes that permitting unconnected analysts access to the issuer’s management before any connected research is released should significantly improve the range and quality of information available to investors and ensure such information is available early enough in the process to support more balanced investor education and price discovery. The FCA plans to work with trade associations representing investment banks and independent research providers to develop common “research guidelines” for unconnected analysts. These would specify “reasonable” terms of access and help determine what might be an appropriate “range” of unconnected analysts to be offered management access. Analysts could then sign up to the guidelines and, in doing so, automatically become part of the community eligible to communicate with the issuer’s management on any equity IPO.
The FCA has asked for views on this proposal and on whether unconnected analysts should be permitted to communicate with the issuer’s management by web-based communications, email or conference calls, rather than physical meetings.
Changes to indicative timetable of IPO process
The FCA is also seeking views on a proposal from the investment banking community which would prevent lengthening of the IPO timetable. Under that proposal, as well as the proposals already mentioned, an approved registration document could be published in the private phase of the IPO process, up to seven days before the “Intention to float” (ITF) announcement and publication of the connected research. A single approved prospectus, containing a price range, could then be published two weeks later at the end of investor education and the beginning of the management roadshow and book-building.3 The FCA notes that it would not expect the IPO timetable to vary materially depending on when unconnected analysts are given access to the issuer’s management (ie. alongside the connected analysts or separately).
Consistency of handling and disclosing inside information in IPO process with MAR
In considering the type of information generated and shared in a typical IPO process, the FCA has been concerned to ensure that it is consistent with the Market Abuse Regulation (MAR).4 The FCA notes in CP17/5 that it agrees that an issuer of debt securities admitted to trading on a regulated market or multilateral trading facility (MTF) is within the scope of MAR, but would extend that to include any financial instruments admitted to trading or subject to a request for admission to trading on a relevant venue. The FCA also agrees that first time issuers will come within the scope of MAR when they make a request for admission to trading on a regulated market or MTF. As a result, the FCA is interested in why firms believe disclosing information in an analyst presentation is in accordance with Article 10 of MAR, which states that unlawful disclosure of inside information arises where a person possesses inside information and discloses that information to another person, except where the disclosure is made in the normal exercise of an employment, a profession or duties.
The FCA considers that there are three types of information typically disclosed in an analyst presentation (operational and financial information on the company, details of the deal, and strategic and forward-looking information on the company) and all should be assessed for the presence of inside information, particularly the strategic and forward-looking information. Issuers should determine whether any inside information on a prospective IPO has been disclosed in accordance with Article 10(1) of MAR (ie. in the normal exercise of an employment, profession or duties). The FCA notes that requiring an analyst to sign a non-disclosure agreement will not guarantee the disclosure of inside information is lawful in accordance with Article 10 of MAR.
The FCA also states that if inside information is identified, the issuer needs to consider its own announcement obligations under Article 17 of MAR and whether communications with potential investors are market soundings under Article 11 of MAR.
The FCA will consider feedback on these issues and, in light of that, if it considers it appropriate to give formal guidance on any of these MAR obligations, it will consult further.
Handbook guidance to mitigate risk of bias in connected research
The FCA is also proposing new Handbook guidance to clarify its expectations on analysts’ interactions with the issuer’s management and their corporate finance advisers when an underwriting or placing mandate and subsequent syndicate positioning is being considered.
Existing Handbook guidance states that analysts should not become involved in activities which are inconsistent with the maintenance of their objectivity and examples of activities which would ordinarily be considered inconsistent with an analyst’s objectivity are provided, including participation in “pitches” for new business. The FCA is now proposing to add further guidance to clarify that it would regard “participating in ‘pitches’ for new business” to include where an analyst interacts with the issuer or its representatives up until the firm employing the analyst has accepted a mandate to carry out underwriting or placing services for the issuer and the firm’s position in the syndicate has been contractually agreed.
Application of proposals to IPOs on MTFs
While the FCA is not formally consulting on whether the proposed Handbook rules should also apply to firms providing underwriting or placing services in an MTF context, it does want to understand in greater detail the similarities and differences between the IPO processes for transactions on regulated markets and MTFs such as the AIM and NEX Exchange growth markets. It will then decide whether a separate consultation on this question should be undertaken. The FCA notes that feedback suggests the current sequencing of information does not create risks in an MTF context in the same way that it does in regulated markets and that connected research can play a less prominent role than it does in offerings on regulated markets.
Responses to the Consultation Paper are requested by June 1, 2017. Depending on the nature of the feedback, the FCA would expect to publish a Policy Statement outlining any Handbook changes later in 2017.