Newsletter for primary market participants
March 2021 / No. 33
About this edition
Welcome to the 33rd edition of the Primary Market Bulletin (PMB) and the first for 2021.
This is a packed edition, featuring Brexit-related changes for EEA audit firms, information on Short Selling Regulation notification compliance, our recent Enforcement outcome against Asia Research and Capital Management Limited and details of our new online portal for submitting major shareholdings notifications (TR-1 Form) which went live on 22 March 2021.
It also includes our review work on issuers’ compliance with major shareholding notifications and deficiencies observed in reporting total voting rights, annual FCA reporting requirements of payments to governments and our response to feedback received on Delayed Disclosure of Inside Information (see PMB 31).
What's new
Brexit update
Audit of financial statements by EEA audit firms
Audit firm registration
From 11:00pm on 31 December 2020 all EEA States became third countries following the end of the transition period. This has practical implications for third country (including EEA) issuers which have transferable securities admitted to trading on a UK regulated market and whose auditors are from an EEA State. If you are one of these issuers, your auditors will have to register as 'third country auditors' with the UK’s Financial Reporting Council (FRC) in time for the publication of annual financial statements for financial years beginning on or after 1 January 2021. For more information on how your auditors can register, please refer to the advice from the FRC here. If your auditors do not register, then the financial statements won’t be audited for the purposes of compliance with DTR 4.1.7R (auditing of financial statements).
EEA Audit equivalence
On 9 November 2020, the Department for Business, Energy and Industrial Strategy announced regulations to grant audit equivalence to the EEA States and approve as adequate their audit competent authorities. See the policy paper HM Treasury equivalence decisions for the EEA States for full details of the announcement. Where audit work is undertaken by an EEA auditor, an issuer’s financial statements will be considered to be audited for the purposes of DTR 4.1.7R, as long as the EEA auditor is registered with the FRC.
Short Selling Regulation
Timely disclosures of Net Short Positions
On 14 October 2020, the FCA published a Final Notice against Asia Research and Capital Management Limited (ARCM), and imposed a penalty of £873,118 for the failure to disclose over 150 notifications related to its net short position (NSP) held in Premier Oil Plc. On 5 July 2019, ARCM reached a NSP of 16.85% of Premier Oil’s issued share capital. This position was built over 2 years and resulted in the largest NSP held in a listed issuer in the UK. ARCM submitted delayed NSP notifications to the FCA on 3 December 2019. This is the first enforcement action we have taken for the failure to disclose NSPs in a timely manner, as required under the Short Selling Regulation (SSR).
This sent a strong message to investors with reportable NSPs under the SSR and we remind investors of their notification and disclosure obligations under the SSR and reiterate why their timing and accurate notifications to us is important for the market.
Importance of net short position disclosure
Following the end of the transition period, the SSR was converted into domestic law (UK SSR). The purpose of the short selling regime is to improve transparency within financial markets and enhance market integrity. Short selling activity can play an important role in ensuring the proper functioning of financial markets. It can contribute to market liquidity and efficient price formation. However, to support that, it is important that persons undertaking short selling activities ensure that they meet their obligations under the UK SSR, to provide appropriate transparency on short selling activities to the market and to support the orderly functioning of the market.
Persons failing to comply with their obligations under the UK SSR can potentially disrupt the orderly functioning of financial markets. For example, failure to comply affects our ability to monitor short selling activity and market participants’ ability to use accurate public disclosure of net short positions to make informed investment decisions. We use this opportunity to remind market participants of the importance of making timely and accurate disclosure of their NSPs to us.
Reportable net short positions and UK sovereign debt
From 1 February 2021, the Short Selling (Notification Thresholds) Regulations 2021 (the Regulations) reduced the notification threshold under Article 5(2) of the UK SSR from 0.2% of the issued share capital of an issuer that has shares admitted to trading on a UK trading venue (UK Regulated Market and UK Multilateral Trading Facility) to 0.1%. Accordingly, an NSP is reportable to us when it reaches 0.1% of the issued share capital of a company that has shares admitted to trading on a UK trading venue and at every 0.1% increment thereafter.
Under Article 6 of the UK SSR, an NSP in such shares must be made public when it is equal to or greater than 0.5% of a company’s issued share capital. Public notifications submitted to us are made available here on our daily update spreadsheet.
The UK SSR also requires NSP disclosures for holdings of sovereign debt and sovereign credit default swaps.
Short position and scope of instruments
The UK SSR states that ‘a short position includes a transaction in financial instruments related to a share which gives the effect of conferring a financial advantage on the person entering it in the event of a decrease in the price of the share’. This includes positions held in derivatives such as equity swaps and contracts for difference relating to shares.
Restrictions on uncovered short sales in shares
The UK SSR restricts uncovered short sales in shares to prevent ‘naked’ short selling, which can harm market integrity and disrupt settlement. To meet their obligations under the UK SSR, market participants must ensure that they only enter into a short sale of a share where they have borrowed shares or entered into an agreement to borrow shares, or have an arrangement with a third party who confirms that the shares have been located.
Notification timings
Under Article 9 of the UK SSR, NSP calculations should be conducted at midnight on the day of the transaction. A notification reportable to the FCA should be submitted no later than 15:30 on the next trading day after the position was reached.
How to submit Net Short Position Notifications to us
A NSP notification can only be submitted to the FCA using our Electronic Submission System (ESS) portal. An ESS account is needed to access this system. Once an account is created and approved, a registration request to be a reporting person on behalf of a position holder can be submitted.
For more information on how to register and submit notifications, please see our SSR pages and registration user guide here.
Consultation feedback and changes to the Knowledge Base
Schemes of arrangement
We continue to consider responses to draft Primary Market/TN/606.1 – When a prospectus is required where securities are issued pursuant to Schemes of Arrangement, published in PMB 30.
We note that respondents felt that a prospectus is not required even where a scheme includes mix and match facilities. We are considering these responses and will provide further information in a future PMB.
Review of payments to governments disclosures by issuers in the extractive industries
In 2020, we conducted a review of disclosures by UK issuers for the financial year ending 2019 (FY2019), for the requirements set out in DTR 4.3A. We identified several issues to relay to the market.
Background
Issuers active in the extractive or logging of primary forest industries have been required to produce a standalone report annually disclosing their payments made to governments for each financial year. The requirements are set out in DTR 4.3A (The requirements in DTR 4.3A have been extended to certain listed companies by LR 9, LR 14, LR 15, LR 18 and LR 21.).
In 2019, we conducted a series of reviews for DTR 4.3A and shared our results and concerns in PMB 20. In 2020, we conducted another review and our feedback is below.
Rules
Before the end of the transition period (the reports covered by the review were published prior to the end of transition period) issuers were required to comply with DTR 4.3A if:
- they were active in the extractive or logging of primary forest industries
- they had transferable securities admitted to trading on an EU regulated market (including debt instruments and depository receipts)
- their Home State for Transparency Directive purposes was the UK
Certain listed companies (premium listed companies other than open-ended investment companies and companies with a standard listing of shares or depository receipts) which were not already required to comply with the Transparency Rules, or with corresponding requirements imposed by another EEA Member State, were also required to comply with DTR 4.3A as if they were an issuer for the purposes of the Transparency Rules.
After the end of the transition period, issuers are required to comply with DTR 4.3A if:
- they are active in the extractive or logging of primary forest industries
- they have transferable securities admitted to trading on a UK regulated market
Certain listed companies (premium listed companies other than open-ended investment companies and companies with a standard listing of shares or depository receipts) which are not already required to comply with the Transparency Rules are also required to comply DTR 4.3A as if they were an issuer for the purposes of the Transparency Rules.
We remind issuers once again of the main requirements (summarised below) where we saw the biggest deviation from the rules.
1. Payment threshold
A payment, whether made as a single payment or as part of a series of related payments within a financial year, doesn’t need to be covered in the report if it is less than £86,000. However, the absence of any qualifying payments in the relevant period does not exempt an issuer from production of a report.
2. Production, publication and filing of a report
Listed issuers that are in scope of DTR 4.3A should disclose payments made to governments in a standalone report which must be made public at the latest 6 months after the financial year-end (the Payments to Governments Report). The report must be filed in XML format as required by DTR 4.3A.10R.
3. Equivalence
No determinations of equivalence have been made by the FCA in respect of the rules in DTR 4.3A for the purposes of DTR 4.4.8R in relation to any non-EEA State or third country, either before or following the end of the transition period. Therefore, the exemption in DTR 4.4.8R is not available in relation to the rules on reports on payments to governments set out in DTR 4.3A and all issuers within scope of DTR 4.3A are therefore required to comply with those rules.
4. Content of the report
The Payments to Governments Report should always include the following:
- breakdown by payment type
- breakdown by project (where payments have been attributed to a specific project, the total amount per type of payment for each such project and the total amount of payments for each such project)
- breakdown by government (including any national, regional or local authority, department or agency)
Outcome of the Review
The main points arising from our review are as follows:
- When using the National Storage Mechanism (NSM) to file the Payments to Governments Report, issuers should be aware that uploading the report in human-readable format alone (and not also in XML format using the prescribed XML data schema) is not enough to meet the DTR 4.3A requirements. This concerns us, as reports in XML format were located for only a minority of issuers in scope of our review.
- We identified that nearly a fifth of Payments to Governments Reports reviewed were missing sufficient breakdowns by project.
- Over 10% of all Payments to Governments Reports for the period were not filed with the NSM, which is required by DTR 4.3A.10R (filing of reports on payments to governments).
- Several Payments to Governments Reports were disclosed as a part of the annual financial report rather than as a standalone report.
- Several issuers in scope omitted publication of the report stating that no payments have been made, or payments have been below the threshold. This does not exempt them from the obligation to prepare, publish and file a report, disclosing this information.
- Several issuers in scope omitted publication of the report stating they are exempt on the basis of similar filings. We remind issuers that no determinations of equivalence have been made by the FCA in respect of DTR 4.3A. Therefore, all issuers within scope of DTR 4.3A are required to comply with those rules.
Conclusion and Recommendations
We have opened preliminary enquiries (The Enforcement Guide (EG), 2.7 Sources of cases) into several issuers’ compliance with DTR 4.3A. Overall, we are concerned that compliance did not improve markedly after our previous review. We will revisit this review in the future and assess whether stronger interventions are required (including, where appropriate, enforcement investigations).
Feedback on Review of Delayed Disclosure of Inside Information
In PMB 31, we published Review of Delayed Disclosure of Inside Information (the Review). Since the review’s publication we received several queries. We welcome this feedback and set out our response below.
Background
The Review covered notifications received over a 17 month period ending in November 2018. The notifications were categorised by certain types of inside information and we added price movements of the date of publication of the information.
The article did not contain any new guidance and it was not our intention to drive wholesale change to market practice. However, the results may indicate that pockets of poor practice still exist. We are concerned about the low overall volume of notifications and the potential that some issuers are not aware of the requirement to notify the FCA where an issuer has delayed disclosure of inside information under Article 17(4) of the Market Abuse Regulation (MAR).
While compliance with the notification regime doesn’t guarantee an issuer’s compliance with MAR, a clear understanding of the existence of inside information and the rationale for its delay are necessary both to make a notification and to comply with the regime more broadly.
Periodic financial information
FCA guidance for periodic financial information and Article 17(4) of MAR is contained in Technical Note 506.2. We received some feedback that the dataset we used covered a period prior to this publication.
The Review repeated existing FCA guidance which encourages issuers to begin with the assumption that information relating to financial results could constitute inside information and states that the FCA expects issuers to exercise judgement in assessing whether inside information exists. The Review was not intended to change this guidance.
The factors that we highlighted in the Review do not indicate that we wished to challenge market practice. This practice might reasonably be expected to involve considerations like the extent to which:
- The periodic financial information contains an item or items that are themselves inside information for which no legitimate interest to delay disclosure exists, Article 17 of MAR requires that the inside information is announced without delay. Where there is no delay in disclosure of inside information or no inside information exists, no notification under Article 17(4) of MAR would be required.
- The totality of the periodic financial information is inside information. This typically includes an assessment of whether the results and other content differ from market expectations, where such expectations can be ascertained. Where a decision is reached that periodic financial information is not itself and does not contain inside information no notification needs to be submitted.
Board changes
We received some feedback about challenges with complying with Article 17 of MAR in the context of board changes. Comments were around the extent to which information is ‘precise’ for the purposes of Article 7 of MAR and also noted the desire among issuers to present an orderly transition.
We appreciate the ‘precise’ definition requires judgement and this is factored into our surveillance, monitoring and case selection when considering potential investigation via our enforcement division. However, with regard to the desire to present an orderly transition, our view remains as contained in Technical Note 521.3:
'It is generally not acceptable for issuers to attempt to choreograph the assessment and possible disclosure of various and offsetting information that may individually meet the tests for inside information. It is vital that issuers disclose all inside information they have in accordance with MAR and do not attempt to delay the publication of negative news, for example, until there is offsetting positive news’.