The Transparency Directive is an important part of the European Commission's Financial Services Action Plan. But it has received relatively little attention from companies and market participants.

Why the Transparency Directive matters
One of the objectives of the European Commission’s Financial Services Action Plan is the creation of a single pan-European capital market. The Transparency Directive (TD) is an important part of that goal, but has received relatively little attention from companies and market participants.

This is surprising, as it may have far-reaching effects for all quoted companies trading on a regulated market, as well as for their investors.

The TD covers four basic areas: the production of periodic financial information; the disclosure of major shareholdings; the dissemination of information to the market; and the storage of that information. The TD also allows EU member states to impose additional domestic requirements. So the obligations imposed on companies and investors may vary from country to country.

Periodic financial reporting
The TD requires companies to produce annual and half-yearly financial reports. These must include financial statements and a management report (the contents of which are determined by other legislation).

The TD also requires a statement by the people in the company responsible for the reporting information (directors in the UK).

These people will have to confirm that the accounts give a “true and fair view of the... financial position” of the company and that the management report gives a “fair review of the... performance of the business” as well as a description of the “principal risks and uncertainties” that it faces.

While this gives an opportunity for the company to explain its performance to investors, there are clearly some legal risks associated with making such forward-looking statements.

For issuers that do not already report quarterly, there is a new obligation to produce an “interim management statement” for the first and third quarters. Among other things, these statements have to give a general explanation of the material events, financial position and performance during the period.

Disclosing major shareholdings
Investors in companies trading on a regulated market are obliged to notify the company when they reach, exceed or fall below certain proportions of the voting rights in the company.

Although the TD specifies various thresholds (five, ten and 15 per cent, etc), these thresholds will vary from country to country. So investors will have to know what the thresholds are for each company.

Issuers will be required to announce the total voting rights in their company at the end of each month where there has been a change. This will be very useful for investors but may be something of a challenge to produce for some companies.

As the focus of the TD disclosure requirements is voting rights, it will result in significant changes for the UK regime, which is based on the concept of an “interest in shares”. This definition means it is possible to understand who is holding a stake in shares in a broader sense (for example, through financial instruments other than shares).

The investigative regime for UK companies, which allows them to find out who owns their shares, will continue the link to interests in shares. So it will be necessary for investors and companies to maintain two parallel information systems.

The disclosure of economic holdings, such as contracts for difference, is outside the scope of the TD. However, the FSA is interested in companies’ views on whether disclosure of such holdings would be useful.

Releasing information to the market
Under the TD, companies will be obliged to disclose “regulated information” on a fast and pan-European basis. The current UK regime broadly meets these requirements but there may be greater changes in other parts of Europe.

For example, in some European Union member states, there will be a significant take-up of corporate newswires that can guarantee simultaneous pan-European distribution.

Storing information
The final piece of the TD is the central storage mechanism. The standards applicable to this are still being finalised and, until they are, the European Commission has said that “some kind of access to regulated information” will be sufficient.

Again, we believe that the current UK regime will achieve this result with minimal change, but this may be very different in other jurisdictions.

Companies across Europe will be subject to different degrees of change as a result of the introduction of the TD but no company will be unaffected. There are clearly opportunities for companies to embrace change and use it as an opportunity to improve communication with existing and new investors. And there are clear dangers for companies that choose to ignore change and hope for the best.

Key benefits

Mike Duignan is primary markets policy manager at the UK Financial Services Authority

Disclosure rules explained
The Transparency Directive (TD) aims to improve the transparency of the European Union’s capital markets by harmonising the standards by which quoted companies file, distribute and store financial information.

The TD is a framework directive under which more detailed rules (Level 2) and guidance (Level 3) have been drawn up. It must be implemented by EU member states by January 20, 2007.

The European Commission calls the TD a “minimum harmonisation” directive, meaning EU states must meet a minimum threshold of legislation. However, they can add more stringent rules or “super-equivalent” measures as they see fit.

It is a “principles-based” approach, so the TD will mean different things in different countries, depending on what they have adopted already and what kind of “gold-plating” they attach. So what will be the implications for investor relations teams?

Reporting frequency and content
For a start, all EU IR teams will have to produce annual financial reports within four months of the end of the financial year, and half-year reports within two months of the period-end.

The annual report must include an audited financial statement, a management statement, an audit report and an appropriate “statement of assurance”.

The half-year report must include a (condensed) financial statement, a management report (covering risks and uncertainties for the next six months) and another assurance statement. However, audit information is only needed if auditors have taken another look at the numbers.

Companies must also file interim financial reports. This will be a big change for those not currently reporting on a quarterly basis, although the Commission has relented on its original intention to have full, US-style quarterly reporting.

The interim report requires a confirmation statement by “persons responsible”, verifying that it gives a fair view of the company’s development and performance, and that the financial statements give a “true and fair” view of the assets, liabilities and financial position.

The TD also affects private firms with publicly-traded debt. They, like quoted companies, will be required to release half- and full-year results, and will rapidly have to get up to speed with investor relations issues.

One anomaly: companies that publish their year-end financial results after January 20 will need to comply immediately; those that release results in December 2006 will have another year to comply with the TD.

Investor disclosure
IR directors will also need to keep tabs on changes in investors’ holdings. The TD sets disclosure thresholds at intervals of five per cent up to 30 per cent, at 50 per cent and also 75 per cent. When an investor’s holding reaches any of these limits, it must inform the company.

Under current UK rules, disclosure starts at three per cent, rising in single-point increments.

Shareholders must notify the company within four trading days of the threshold being passed, while the issuer must notify the market no later than three trading days after that. Germany has already drafted legislation cutting its threshold from five to three per cent, in line with UK practice.

Regulators there are keen to avoid a repeat of last year’s “creeping” investor rebellion at stock exchange group Deutsche Börse.

Dissemination
IR professionals will also need to distribute financial information simultaneously and in a “timely” fashion to all potential EU investors. The TD says that companies must disseminate their statements to a wide range of newswires and websites.

IR professionals will need to make sure that they have necessary distribution systems set up – possibly with a specialist news distributor – and that they are making the best use of whatever technology is on offer. For a full rundown of the options, see the “IR?toolkit” section of this guide.

Storage
There are also new requirements for how companies store financial information. Although the rules are yet to be finalised, the Commission wants to create an integrated network of databases (an “Officially Appointed Mechanism” or OAM) in each member state.

It is unlikely that all of these will be set up by next January, though some countries have systems in place that already comply.

The Financial Services Authority, the UK regulator, is currently consulting on whether to create a commercial or an FSA-run OAM, and is considering how such a system would interact with existing primary information providers (PIPs).

The final aim is to create an EU version of the US Electronic Data Gathering, Analysis and Retrieval system (EDGAR).

The checklist: be prepared
As the TD is implemented at a national level, its requirements will vary from market to market. It is therefore important for companies to stay in close contact with their national regulators so they keep up-to-date with all the advice and guidance that is available on specific points.

For example, the UK regulator, the Financial Services Authority (FSA), published a 270-page consultation paper on the TD in March, and companies had an opportunity to voice their views until June. It hopes to finalise its regime by October.

Mike Duignan, who is in charge of implementing the TD at the FSA, says that, above all else, companies need to understand what the new rules mean for their systems and controls.

Staying informed is also important because member states may seek to “gold-plate” the TD’s requirements, introducing tougher requirements on companies listed in their jurisdictions.

Alex Money, at IR consultant Luxtal, says this opens a “corridor of uncertainty” about the final shape of national laws. He suggests that companies lobby to ensure that the TD is “sufficiently flexible” and does not add excessive costs or waste management time.

Pushing electronic boundaries
In order to comply with the TD’s rules on simultaneous and timely EU-wide disclosure, companies will need to make sure that their current range of systems and technology is up to the task.

Primarily, that will mean real-time news feeds to all markets around the world. It is hoped that this demand for transparency will encourage companies to use more sophisticated electronic communications such as email alerts, webcasts and interactive reports and accounts.

Interim reports
Companies that do not report quarterly will need to decide how to meet the requirement for interim management statements in quarters one and three. Exactly how these statements will look is still the subject of some debate, and will probably not become clear until a few quarters have passed under the TD.

IR directors will need to have discussions with lawyers to ensure that the TD’s requirements for forward-looking narrative statements do not expose their company to extra legal risks.

They will also need to liase with accountants to ensure that they are up to speed with the new auditing timetable. There is also the issue of when companies should report: the TD says interim reports need to appear between ten weeks after the beginning and six weeks before the end of the relevant six-month period.

Signing off
The interim statement requirement also places greater responsibility on whoever is providing the statement of assurance. Interim statements must disclose “material events” and a description of financial performance during the period.

Discussions about narrative reporting, and pressures for better forward-looking information, in directors’ reports has raised concerns about the liability of directors. A safe harbour is due to be implemented in the UK for forward-looking information. It is hoped that this will reassure directors who might otherwise be too cautious.

Stuart Morgan, investor relations manager at Buchanan Communications, says that IR directors need to decide who is going to give an assurance that the statements provided are accurate, and be aware of the potential legal risks involved.

Keeping tabs on your shares
The TD rules on share disclosure thresholds require companies to maintain a clear and continuous view of its shareholder register, and what voting rights are attached. At the end of any month in which a disclosure threshold has been passed, companies need to publish an appraisal of total voting rights.

Firms must also have systems in place that can handle this effectively and expeditiously. How they do this will vary from country to country. UK firms may have special responsibilities as the regulator wants to maintain parallel systems based on both the old UK rules and the new Transparency Directive ones.

Don’t wait until it’s too late
Although the final shape of the rules in every EU member state is not yet decided, waiting until later this year is not an option for companies that want to comply. There are still some rough edges to smooth out but the basic shape of the rules is well defined in most countries.

Where it is not, it is often clear from regulators’ statements which way it is going. In short, says Duignan at the FSA, do not put it off.

Technology will play a major role in helping companies fulfil the Transparency Directive’s rules on filing, disseminating and storing information. Here is a guide to some of the options and how they can be used most effectively.

News distributors
The TD’s requirement for simultaneous and timely delivery of information across the EU means that companies should seriously consider using a third-party news distributor to maximise their audience.

The TD says companies should disseminate financial statements to newswires, financial data vendors, major financial newspapers and websites.

Gaetan Fron, marketing director at Paris-based Companynews, recently acquired by Euronext, says the advantage of using a news service is that media outlets are more likely to pick up releases if they come from a designated feed.

By delivering releases over trusted communications links, Fron says, they are assured to reach outlets simultaneously, speedily and securely as well as being traceable. What’s more, service providers have pre-existing relationships with outlets in the EU’s 25 member states.

Companies can do the job themselves – sending out releases individually using their own systems. But it can be time-consuming and may not guarantee that releases reach all outlets in a secure and timely manner.

“It is really difficult for a company to be compliant unless they use a service like Companynews,” says Fron. Companies should consider discussing with a news distributor what they might have to do to fully comply with the TD.

The broad, electronic distribution of financial information is common in countries such as Germany and the UK. But many French companies still use paper-based methods such as publishing their statements in national newspapers. These practices will not be compliant with the TD’s requirements for electronic distribution.

Although the TD is clear on the EU-wide requirement, smaller companies may be given latitude if their investors only reside in their home market. The amount of leeway will depend on how regulators in different EU countries choose to comply with the TD.

Service providers such as Companynews point out that they are able to take care of a company’s information filing and storage needs as well as its dissemination requirements.

Email alerts
As email alerts, by their nature, only go to limited lists of investors that have “opted-in”, they do not meet the TD’s disclosure requirements on their own. But they do offer a direct way to reach investors and are increasingly popular with investor relations teams.

Companies need to ensure that messages are compatible with the growing range of handheld and mobile devices as well as PC-based email accounts.

XBRL
The job of disseminating information on a pan-European basis is made that much easier by the advent of new technology standards such as XBRL (eXtensible business reporting language).

XBRL is a new language that promises to allow more efficient electronic filing of financial statements. Instead of treating information as a block of text, XBRL assigns a “tag” to the context and meaning of each piece of data in a way that computer applications can understand.

It therefore allows computers to process financial data automatically, enabling investors, analysts and regulators to exchange and analyse information in a variety of ways.

Olivier Servais, director of the non-profit advocacy group XBRL Europe, likens XBRL to a barcode – a format that is universally recognised. In terms of the TD, one advantage of using XBRL is that financial information is more easily translated between different languages and locations.

The European Commission has asked financial regulators to consider whether to make XBRL compulsory for filings and disclosures - Servais thinks that this is inevitable. Companies such as Microsoft and Reuters already use XBRL for investor relations.

In time, it is likely to become the default format for financial information. With the Microsoft XBRL plug-in, it is already possible to convert Word or Excel financial statements directly into XBRL.

Websites
When the TD was first discussed, the European Commission considered whether companies without the means to distribute on a pan-EU basis could instead post information to their own web sites. But, says Gustav Pegers, head of web design firm Iroqo, this idea was scrapped because asking investors to go to individual web sites to find information was seen as unrealistic.

As it stands, the TD relates mainly to third-party distribution, rather than to company web sites. However, the TD says that companies need to widely disseminate a full-text version of their annual reports – something they may be able to do most simply and cheaply by publishing it on their web sites. Again, Pegers recommends that companies discuss this issue with their primary information provider (PIP) or news distributor.

Given that the TD requires companies to improve transparency, it may be that companies decide to update their web sites as part of the process of complying with the TD. A survey last year by Companynews found that investors prefer documentation to be in html (the basic language of the web) or Flash format – but companies in many EU states fail to present their information this way.

While 90 per cent of German company sites, and 62.5 per cent of Swiss sites, use html or Flash for annual reports and other statements, only one in two do so in France. The numbers are also relatively low in Italy (27.5 per cent), Spain (27 per cent), Belgium (21 per cent) and Portugal (five per cent).

RSS
RSS stands for “Really Simple Syndication”. It is a way to distribute web-based information directly to users, without them having to visit your website.

Investors who subscribe to a company’s RSS feed receive text updates (as well as audio files, photographs or video) as regularly as once an hour.

To get an RSS feed, users need to install a piece of software called a “news reader”. They can then designate exactly the type of information they are interested in receiving.

News sites such as the BBC were the first to use RSS but many companies have followed. For an example, see Royal Bank of Scotland’s investor site: www.investors.rbs.com

Webcasts
Webcasts are increasingly popular investor relations tools, with a number of unique benefits over other forms of IR communications. They provide a direct way for investors to interact with management, irrespective of where they are based around the globe, and allow companies to broaden the audience of people who might normally attend an annual meeting or press conference.

Combined with an online slide presentation, webcasts provide the best of the online world (the ability to deliver a lot of detailed information to a wide audience) with the more human element of a live presentation. Not only that, webcasts, unlike face-to-face meetings, can also be stored and used for future reference.

Webcasting is not strictly a means of complying with the TD. But offering investors an extra way of interacting with a company and gleaning information meets the spirit of the law. For this reason, it seems likely that the requirements of the TD will spur greater use of webcasts across the EU.

In the UK, BP’s IR team has used webcasts since 2000. Peter Hall, BP’s vice-president for investor relations, says the service is appreciated by analysts unable or unwilling to make the trip from their offices.

He says one of the advantages is that investors get to see different representatives “in the flesh”, instead of simply being names on a page: “You get to see an actual person as he talks. The heads of the businesses get an airing. That’s not so easy on the telephone.”

In the past, technical glitches have hampered the development of webcasts. But the advent of broadband and improvements in the technology mean that those days seem to be over, and webcasts are more reliable.

Still, webcasting is not a primary means of distributing information in the first instance – it is more of an add-on for investors who are looking to explore areas beyond the published numbers.

BP typically releases financial statements in the morning, before following up with a webcast in the early afternoon so that investors can hear the message direct from management.

Hall says that given the popularity of BP’s IR webcasts, he can imagine a day when all the company’s communications – including its annual general meeting – will take place in cyberspace.

BP already stages webcast-only events, and Hall says he has noticed fewer people attending events in person as a result.

Despite the benefits of the technology, the use of webcasts in the EU for investor relations is still patchy. The Companynews survey of 261 European companies found that 88 per cent of Swiss companies and 75 per cent of German companies use their web sites for webcasting. This compares with only 25 per cent in Portugal.

Jargon buster
FSAP: The Financial Services Action Plan. This is the European Commission’s project to integrate and harmonise financial markets across the EU. The Transparency Directive is part of the FSAP.

TOD: The Transparency Obligations Directive. All EU member states should have implemented the TOD by January 20, 2007.

PIP: Primary Information Provider – a corporate news distribution service with a license to distribute regulatory information on behalf of quoted companies.

EDGAR: The US Securities and Exchange Commission’s central repository for regulatory information. The implementation of the TD may see the launch of an EU version of EDGAR.

Push and pull: Information can be “pushed” to investors via media such as email. It can also be “pulled” by investors who subscribe to services such as RSS news feeds (see page eight).

MAD: The Market Abuse Directive. Another EU-wide rule that affects the way companies are obliged to disclose information to the market.

Interim management statements: Under the TD, companies that do not report quarterly must produce a summary of business performance following the first and third quarters.