Overview of Primary Market Bulletin No.23 and final Technical Note FCA/TN/506.2
On 16 April 2019, the FCA published Primary Market Bulletin No.23 which includes:
- the updated Technical Note on how issuers should treat inside information when preparing periodic financial reports (Technical Note FCA/TN/506.2) and feedback following the consultation
- findings from a recent review of firms' adoption of (i) the MiFID II requirements governing the provision of underwriting and placing services; and (ii) the UK IPO reforms, and
- an update on the implementation of the EU Prospectus Regulation which takes effect on 21 July 2019.
Technical Note FCA/TN/506.2
The Technical Note has been updated to address concerns about when issuers can delay the disclosure of inside information which is discovered in the process of preparing a periodic financial report. Issuers are required, under the Market Abuse Regulation, to disclose any inside information as soon as possible unless one of the limited circumstances for delay applies.
The final version of this Technical Note is the same as the draft published for consultation in June 2018 other than the addition of a reminder about maintaining the confidentiality of inside information where disclosure has been delayed. It states that the FCA is expecting issuers to:
- begin with the assumption that information relating to financial results could constitute inside information
- conduct an assessment on an ongoing basis (in good faith) throughout the preparation of the report to ascertain whether information constitutes inside information and record and be able to provide evidence of this assessment process to the FCA on request. The FCA confirms that ‘ongoing’ requires issuers to assess and reassess as the situation requires, and
- consider on a case by case basis and not assume that information to be included in a financial report will always or never constitute inside information.
The FCA state that cases where immediate disclosure are likely to prejudice the issuer’s legitimate interests could include where immediate disclosure:
- would impact on the orderly production and release of the report, and
- could result in the incorrect assessment of the information by the public.
In many cases, however, the FCA expects issuers to be able to draft an appropriate announcement that will enable the correct assessment of the inside information by the public without having to publish the full financial report.
The FCA has retained this text and states that “as the Upper Tribunal noted in ‘Hannam’, there will be circumstances where, practically, it would be very difficult for an issuer to formulate an announcement that does not risk misleading the market. In these circumstances, an issuer would be justified in delaying disclosure of the information. But such a situation should not be regarded as the default, or even a common situation. In most cases, if an announcement is skillfully drafted with appropriate care and attention, it is unlikely to result in the incorrect assessment of the information by the public."
The FCA has carefully chosen the language used in the Technical Note to reiterate that delay should be the exception rather than the rule. Issuers are also reminded of the need to ensure that all three limbs can be met to allow them to delay disclosure: a legitimate interest; delay is not likely to mislead the public; and the issuer can ensure the confidentiality of the information.
MiFID II requirements on underwriting and placing
The FCA have reviewed how sell-side firms have embedded the new requirements into their policies and procedures and considered the impact on the functioning of the primary capital markets.
The review found that firms generally have a good understanding of their obligations in this area and have embedded the requirements in their systems and controls. But shortcomings were identified in firms’ adoption of the requirements on (i) informing and engaging with the issuer regarding risk management transactions; and (ii) justifying allocation decisions.
As a result, the FCA is asking firms to reconsider existing practices and firms may want to consider what evidence they can add to the transactional audit trail in future to show that they paid due attention to the points raised by the FCA.
Risk management transactions - the FCA found that firms typically inform the issuer about risk-management transactions that they carry out for themselves but do not discuss risk management transactions carried out on behalf of investors participating in the issue. Any disclosures they do provide are typically generic stating that the bank may, or may not, carry out risk management transactions regarding the offering.
The FCA is expecting firms to consider, on a case-by-case basis, the impact of risk management transactions they undertake on the issuer’s interest. This should include meaningfully engaging the issuer on these transactions as appropriate; and enabling the issuer to assess the potential impact of these transactions on their interests. The FCA recognise that it will not usually be appropriate to inform one client about another client’s transaction. The FCA is, however, expecting the firm to explain to an issuer client at least whether, and in what circumstances, they will undertake risk management transactions and how those could impact on an issuer client’s interests.
Justification of allocations - overall, firms had appropriate controls to manage conflicts of interest when making allocation decisions. When justifying final allocations, however, firms focused on the top 20% of the total allocation by volume and fill and relied on other recorded documentation to justify the remaining 80% of the book.
The FCA does not want firms automatically to assume that other recorded documents will be enough to justify all allocation decisions. Justifications must be explicit and sufficiently detailed and the FCA expect firms to make judgements about whether the records they maintain can genuinely justify the allocation decisions.
UK IPO reforms and analyst conflicts
The review was based of the two IPOs which had been subject to the new IPO reform rules.
Firms are reminded:
- to consider carefully their obligations to manage conflicts of interest where research analysts play a role in providing an internal-facing due diligence advisory service within the firm, before underwriting and placing mandates have been awarded, and
- while analysts producing non-independent research are not subject to COBS 12, firms cannot automatically assume that it is appropriate for their non-independent analysts to participate in pitches. Producers of non-independent research must take all appropriate steps to identify and prevent or manage any conflicts of interest consistently with their SYSC 10 obligations, including during the production and distribution of non-independent research.
EU Prospectus Regulation implementation
The Prospectus Regulation takes effect on 21 July 2019. The FCA will be able to receive prospectuses and other Prospectus Regulation documents intended for approval on or after 21 July 2019 for review from the end of April 2019 onwards. These reviews will be conducted under the new regulation. The FCA will also continue to review documents under the existing regime where approval is scheduled for before 21 July 2019.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.