John Mayo, former Marconi FD and ousted chief executive-designate is in no doubt: the Marconi board made a mistake on 4 July last year when it opted to suspend the shares for a day rather than reschedule a crucial 4pm board meeting as a 6am conference call.
The problem was that Marconi had some good news it could release immediately – the disposal of the medical products division – but it needed the board to agree the wording of a profits warning, and that couldn’t be sorted out until the afternoon. “If the company had announced good news in the morning and bad news in the evening, there would have been a false market in the shares for a whole day,” he recently told the Financial Times.”But that (share price) suspension stoked up every possible rumour that the business was in trouble.”
Mayo, with his career background in investment banking at Warburgs, knew better than most FDs of the regulatory burdens governing the disclosure of price-sensitive information. But as conscious as he was of the stock exchange rules, the consequences for getting it wrong would have been greater had the events taken place after 30 November – the Financial Services Authority’s so-called N2 Day, when new rules and powers came into force.
For one thing, under the new regulatory environment companies and directors themselves can be named and fined by the FSA if they fail to keep shareholders informed. This would seem to make sense, especially as fining a company when its share price has collapsed only penalises investors further. Moreover, the new rules governing “market abuse” effectively operate under civil law, not criminal, so the burden of proof and the rules of evidence make it easier for the prosecuting regulator.
So what is “market abuse”? For FDs, the main aspect concerns failing to disclose price-sensitive information or making selective disclosure of information to favoured analysts or journalists. Even dissemination through the Regulatory News Service (RNS) in a way that is misleading will turn out to be market abuse if it means telling half the story such that people buy shares they would have otherwise sold.
Selective disclosure became a hot topic in the US in 2000 when the Securities and Exchange Commission introduced “Regulation FD” to stamp it out. One of the SEC’s concerns was that companies excluded from meetings analysts who adopted a negative stance on their shares – but still invited other analysts. (A recent Tempest Consultants survey said that 22% of UK companies admit they temporarily exclude analysts from briefings and company visits if they produce “sell” circulars.)
In finalising Regulation FD the SEC also referred to conflicting views on the effectiveness of rules designed to ensure information is released promptly and equally to all market participants: it acknowledged fears that companies may simply stop talking so as to prevent accusations of selective disclosure. But on balance the SEC didn’t think such this was likely to be a problem: “The marketplace simply would not allow companies to cease communications with analysts,” it concluded.
In the UK, the most important document is the PSI Guide, an appendix to the UKLA Guidance Manual governing the release of price-sensitive information.
While it’s largely based on rules that have been around for some years, the power the FSA now has to levy fines and impose compensation orders on companies, directors and advisers will make them all even more careful to abide by it – especially since there is no published tariff of fines and the FSA can levy a charge as big as it likes.
The basic rule is, if you’ve got price-sensitive information, get it out. If there are reasons why you can’t do so straight away, then you’re allowed a short delay, but the FSA isn’t particularly sympathetic to arguments about why information wasn’t released immediately.
FDs should also ensure they have the right systems and procedures in place to ensure price-sensitive information comes up through the corporate ranks to enable the board to make an announcement. It’s not going to be a defence for a director of a company to say, “No one ever told me,” if, in fact, it was his responsibility to ensure he was told. There’s nothing much anyone can do if someone down the chain of command hides this kind of information from the FD – but it is imperative to make sure everyone knows that no one other than the relevant people should talk to the press.
– The PSI Guide is available at www.fsa.gov.uk
SO WHAT DO YOU SAY?
Now there are steep penalties for non-disclosure, it’s more important than ever to say the right thing. Here are examples of when to talk – and what to say.
You’re contemplating a number of major strategic options – one of which may be receivership if the other options don’t work out. What do you say?
If you say you’re in financial trouble it can become completely self-fulfilling. But that’s not a reason for not doing it. If it’s something that might happen unless you manage to pull off a rescue, you’re not in a position where you have to make an immediate announcement. If it’s a fig leaf, you may be.
The market gets hold of an unfounded rumour that is distorting your share price. Do you have to say anything?
“The fact that a company has nothing to announce can, in certain circumstances, be price-sensitive,” says the PSI Guide. While the company is not required to make an announcement, the guide would “prefer” that it does so via RNS, not a briefing to a journalist. If you’re going to adopt a ‘no comment’ policy you must use it consistently.
An analyst produces a forecast that is significantly off-beam: are you under an obligation to correct him?
The PSI Guide simply says companies “should consider correcting serious and significant errors”. Small, under-researched companies may be more adversely affected by an ill-founded forecast and are more likely to have to issue a corrective statement.
An analyst asks some very probing questions. How do you answer?
The company should not answer such questions by disclosing price-sensitive information. Either refer to already published information or provide non-price-sensitive information. Analysts are expected by the PSI Guide to not put companies in a position where they are likely to commit a breach of listing rules.
We embrace technology by webcasting our results meeting – can we forget about RNS?
Webcasting is fine from an investor relations point of view, but it’s not enough to comply with the rules.