Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the harmonisation of transparency requirements with regard to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. INTRODUCTION

1.1. Context

Transparency about publicly traded companies is essential for the functioning of capital markets, enhancing their overall efficiency and liquidity. This proposal for a directive should markedly improve the information made available to all investors about publicly traded companies on regulated securities markets within the European Union. It will therefore help integrate further Europe's securities markets by reducing or eliminating information asymmetries, which may hamper comparability and market liquidity; by enhancing investor confidence in the financial position of issuers; and by reducing the cost of accessing capital.

The current initiative is one of the priority actions in the Financial Services Action Plan (FSAP), endorsed by Heads of State and Government at the Lisbon European Council in March 2000. The aim is for Member States to have successfully implemented the agreed directive by 2005 at the latest - a commitment affirmed by Heads of State and Government at Stockholm in March 2001 and at Barcelona in March 2002.

Therefore, the proposal is part of a strategy for overhauling securities markets legislation, in particular for achieving a greater level of transparency and information in respect of issuers whose securities are traded on regulated markets. The proposal belongs to a "disclosure and transparency agenda" on which the European Institutions are currently moving forward:

* the Regulation on the application of International Accounting Standards (IAS) [1], which will make mandatory the application of IAS to the drawing up of annual accounts, for all companies whose securities are admitted to trading on a regulated market and who prepare consolidated accounts, as from 1 January 2005 (with limited exceptions given until 2007). The present proposal is in line with this policy adopted by the EU. However, this does not alter the procedure introduced by the IAS Regulation which subjects each individual standard - including IAS 39 - to a formal decision by the EU, in accordance with the procedure in the Regulation, before the standard becomes legally binding in the EU. This Directive does not pre-empt or prejudice in any way such decisions;

[1] Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, OJ No L 243 of 11.9.2002, page 1.

* the Directive on Market Abuse [2], which will, inter alia, require issuers to publish inside information. The existing ad-hoc disclosure requirements of price sensitive information are to be replaced thereby strengthening disclosure requirements;

[2] Directive No 2003/6/EC of the European Parliament and of the Council on insider dealing and market manipulation (market abuse), adopted on 3.12.2002 not yet published in the OJ.

* the future Directive on Prospectus [3], which will deal with initial disclosure requirements at the point of public offer of securities/its admission to trading on a regulated market. The Directive should provide for an European passport for a prospectus. The current proposal already takes into account the Council political agreement of 5 November 2002 towards a common position, which the Commission fully supports.

[3] Amended Commission proposal for a Directive of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC - COM (2002) 460 final of 9.8.2002.

Successful adoption and implementation of all these initiatives, including the present one, represent an indispensable contribution to the overall regulatory framework for securities markets. The proposed Investment Services Directive (ISD) [4] will only work effectively and be a success if this new set of regulatory transparency requirements are in place at the same time.

[4] Commission Proposal for a Directive on Investment Services and Regulated Markets, and amending Council Directives 85/611/EEC, 93/6/EEC and European Parliament and Council Directive 2000/12/EC of 19 November 2002, COM (2002) 625 final.

1.2. Objectives of the current initiative

The proposed directive envisages to impose a level of transparency and information commensurate with the aims of sound investor protection and market efficiency. In order to achieve these aims, the current initiative should be consistent with all the legislative initiatives mentioned above: its scope should be extended from official to regulated markets, thus bringing second tier markets within its scope (see Section 3.1.), it should ensure greater openness to the world of international finance in terms of use of languages; and also in the use of modern information technologies (see Section 3.2). Finally, the proposal should constitute an appropriate response to developments in the US, including the Sarbanes-Oxley Act, for promoting European capital markets (see Section 3.3.).

The initiative reforms requirements in the form of standardised information at a certain point (periodic information) or information on an ongoing basis. Its objectives are:

* To improve annual financial reporting by security issuers through disclosure of an annual financial report within three months (see Section 4.2);

* To improve periodic disclosure of share issuers over a financial year, by introducing a pragmatic policy mix of more detailed half-yearly financial report and less demanding quarterly financial information for the first and third quarter of a financial year . This solution is in the middle of two extreme positions: one extreme position would be to require three fully-fledged quarterly financial reports based on highest international standards, similar to the requirements in the US. The other extreme would be to stay at a level of corporate transparency where the European Union has been for twenty years (prior to the Internal Market). Such an extreme position would ignore that capital markets now act and react much faster, that the allocation of capital amongst publicly traded companies is subject to more competition. Finally, investors investing in several Member States should benefit from more reliable and standardised financial information cycles instead of solely relying on ad-hoc disclosure issued by companies. This does not mean that the new rules on interim financial information should replace continuous disclosure obligations (see Section 4.3);

* To introduce half-yearly financial reporting to issuers of only debt securities who are currently not subject to any interim reporting requirement at all. Again, the Commission pursues a very pragmatic approach (see Section 4.4.);

* To base on-going disclosure of changes to important shareholdings in issuers on proper capital market directed thinking. This should lead to more frequent information within stricter disclosure deadlines (see Section 4.5);

* To update existing Community law on the information provided to security holders (holders of shares or debt securities) in general meetings through proxies and electronic means. This aspect is particularly important for investors resident abroad (see Section 4.6.).

The current initiative will ensure sound investor protection and the properly functioning of financial markets. As a consequence, it should lead to the effective removal of national barriers for issuers seeking access to regulated markets not only in their home Member State, but also in other Member States. Member States would not carry any justifiable risks of undermining their national investor protection because Community law would already ensure robust requirements. However, the issuer's home Member State should be allowed to impose more stringent disclosure requirements (see Section 4.1).

2. A NEW WAY OF REGULATING SECURITIES AT COMMUNITY LEVEL

2.1. Two rounds of open and public consultation

The European Council invited the European Commission, in its Resolution of 23 March 2001 on more effective securities markets regulation, "to make use of early, broad and systematic consultation with the institutions and all interest parties in the securities area, in particular strengthening its dialogue with consumers and market practitioners". This should facilitate adoption of legislative measures and allow their timely implementation by 2005.

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The Commission has met its part of the bargain. Its Internal Market Directorate General carried out two written consultations before bringing forward this proposal. On 11 July 2001, it invited reactions from interested parties to a consultation document in which it presented its preliminary views. There were 91 responses from all the Member States, but also from third countries. In December 2001, it published a summary of the replies received. The Internal Market Directorate launched a final consultation on 8 May 2002. In this round, it revised particular aspects, such as interim financial reporting, and presented a detailed outline of its ongoing work on a possible proposal. Again, it received 93 replies from all Member States and from third countries. The arguments presented are reviewed below. The 184 responses received in the two consultation rounds cover a broad spectrum of interests:

2.2.

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A directive containing essential principles, not technical details

A serious reform should be brought about on the basis of a new way of regulating securities markets at Community level. Adoption of this Directive should indeed be easier by virtue of the fact that the proposal is built on the recommendations in the Final Report of the Committee of Wise Men, chaired by Alexandre Lamfalussy, of February 2001. Its recommendations centred on a new four level approach for regulating securities markets, so as to be able to complete the FSAP by 2005.

The report recommends that Community legislation, adopted using the co-decision procedure, should focus on essential principles and policy options, but no longer on all technical details ("Level 1"). Technical implementing rules at Community level are adopted by the Commission (relying on the technical advice and expertise of national securities supervisors) according to the existing comitology procedures, whereby the Commission is assisted by a "Regulatory Committee" (the European Securities Committee (ESC [5]) "Level 2"). Co-operation amongst national securities supervisors in the Member States on the day-to-day implementation of Community law should be reinforced, notably through the Committee of European Securities Regulators [6] ("Level 3"). Enforcement of Community law by the European Commission should also be strengthened ("Level 4").

[5] This Committee has already been established by Commission Decision No 2001/528/EC of 6.6.2001, OJ No L 191 of 13.7.2001, p. 45. It only acts in an advisory capacity. In this respect, it has also been consulted on the present initiative.

[6] Established by Commission Decision No 2001/527/EC of 6.6.2001, OJ No L 191 of 13.7.2001, p. 43.

The four-level approach was expressly endorsed by the European Council in its Resolution of 23 March 2001 on more effective securities market regulation in the European Union. Equally, the European Parliament supported such a regulatory reform in its Resolution on the implementation of financial services legislation of 5 February 2002 in the light of the declaration made by the President of the European Commission at that day. The current initiative is based on this new approach and accordingly aims at allowing a split between level 1 and level 2 legislation. Section 5 explains how the Commission believes that technical details should be left to "level 2 legislation".

3. CONSISTENCY WITH OTHER SECURITIES MARKETS INITIATIVES UNDER THE FSAP

3.1. Community legislation covering regulated markets

The IAS-Regulation, the recently adopted Directive on Market Abuse, the future Directive on Prospectus, and the proposal for a revision of the Investment Services Directive - all concern issuers whose securities are admitted not only to official listing, but to regulated markets, thus covering second tier markets [7]. Along the same lines, periodic financial reporting, information through general meetings of security issuers for security holders, information about major changes to shareholdings as well as other ongoing information should be regulated with regard to not only official, but also regulated markets at Community level.

[7] such as the Second Marché and the Nouveau Marché in Paris, the Alternative Investment Market in London, the Geregelter Markt and the Neuer Markt in Frankfurt, the Mercato Ristretto in Milan, the Nuevo Mercado in Spain or the Nouveau Marché in Belgium.

During the two consultations, some parties asked for clarification on situations where an issuer has never requested or approved admission of its securities to trading on regulated markets in any Member State. This issue will primarily be addressed in the framework of the proposed new Directive on investment services and regulated markets - the initiative harmonising the requirements for regulated markets to admit securities to trading on regulated markets [8]. The Commission proposes to link expressly mutual recognition of regulated markets under that Directive with the need for issuers to comply with all securities legislation at Community level.(. The current proposal only covers a specific aspect which cannot be left to operators of regulated markets: Issuers who have never requested or approved admission of its securities to trading on a regulated market may not be required to provide translation of periodic financial reports under a specific language regime. In such a case, these obligations will be incumbent on any third party who has asked for such admission (see the proposed Article 16 (4)) .

[8] Commission Proposal for a Directive on Investment Services and Regulated Markets, and amending Council Directives 85/611/EEC and 93/6/EEC and European Parliament and Council Directive 2000/12/EC of 19 November 2002, COM (...) 2002, see Article 37 (5) thereof. According to this provision, the issuer's consent is no longer necessary in the case where securities should be admitted to trading on a further regulated market.

3.2. More openness to the world of international finance

3.2.1. Use of a language customary in the sphere of international finance

At present, each Member State may insist that information be disclosed to the public in its official language(s). Reactions to two consultations demonstrated that this is costly and burdensome for issuers whose securities are admitted to trading in several Member States.

Further integration of financial markets in the EU will make the language issue more important. It is necessary to provide for a system which would counter these problems. An unsatisfactory solution would also undermine the value added by the future Directive on prospectuses. For the same reasons, the proposed language regime under this Directive would also apply to information that is to be disclosed on an ad-hoc basis under Article 6 of the Market Abuse Directive. Finally, the proposal deals with information to be supplied by investors to the issuers. In order to enhance not only cross-border acquisition of shares within the EU but also in order to attract more third country investors as well, the proposal provides that investors should be able to notify changes to their shareholdings to the issuer in a language customary in the sphere of international finance.

The Commission proposes that issuers whose securities are admitted to regulated markets in more than one Member State may also opt for a language customary in the international sphere of finance. For wholesale markets, issuers may always choose such a language.

The present proposal contains a marked difference compared to the future Prospectus Directive: it would not allow Member States to require issuers to make available periodic financial reports or ongoing information in its official language. It is recalled that the future Prospectus Directive still allows Member States, if they wish so, to require the translation of a summary of a prospectus into their own languages.

That said, the current proposal would not lead to a system where host Member States could request a translation. Indeed, the proposal does not affect the right of a host Member State to impose appropriate publication of a certified translation of accounts by publicly traded companies, provided such companies open a branch on its territory. This right is already laid down in the Eleventh Company Law Directive. Moreover, the current proposal should not prejudice language requirements in judicial procedures before courts. Finally, it differs from the solutions established for a prospectus in cases where an issuer's securities are only admitted to trading on a regulated market in a single host Member State, but not in its home Member State to avoid a kind of "forum shopping" or even "language shopping".

For further details, please see the explanations to the proposed Article 16 in Section 5.

3.2.2. Reaping the benefits of modern information and communication technology

- Single source of information about an issuer throughout the European Union

At present, Member States are free to require which dissemination means an issuer should make use of. This led to an enormous diversity of information channels because each Member State may pursue its own policy. Three different models are basically used: dissemination is organised by the national supervisory authority itself, by operators of regulated markets, or by other competing financial information providers [9]. In addition, Article 102 of Directive 2001/34/EC allows issuers to publish their information on their own initiative via the press.

[9] Model chosen by UK concerning the so-called primary service providers (PIPs).

This has led to complexity in the ways information is disseminated throughout the European Union. In many Member States, information about the same issuer cannot be found from the same source. The three models vary according to the type of information to be provided. As an important first step, it is important to establish under Community Law that Member States should no longer impose the use of operators established on their territory or the use of different media for different types of information about the same issuer. The overall goal should be that an investor should find all periodic and ongoing financial information (including those published on an ad-hoc basis) in relation to a particular issuer from a single source.

- The issuer's Internet site accompanied by an efficient electronic alert system

Dissemination of information through the Internet sites of the issuers is currently not be considered as a sufficient appropriate method on its own. This should change with respect to issuers whose securities are admitted to trading on more than one Member State. Such a use would however not be sufficient on its own, but must be accompanied by an efficient e-mail alert mechanism which a company is to set up to inform all interested parties on a real-time basis of any change to information presented on its Internet sites. The technical details of such a system should be laid down in implementing rules to be adopted in accordance with the comitology procedure.

If the use of the issuer's Internet sites were not addressed under this initiative, Member States might be tempted to stick to their existing national systems. The means which Member States may impose for effectively disseminating information are not only technicalities falling under the principle of subsidiarity. National differences in the dissemination requirements for issuers must be seen as a further obstacle in the whole chain of barriers preventing issuers from seeking access to the regulated markets in several Member States. These national differences also impede investors' decision-taking across Member States.

For further explanations see comments to Article 17 in Section 5, but also section 4.5.

- Electronic networks across Member States to further simplify the investor's access to information

The situation in Europe stands in marked contrast to the situation in the US where the EDGAR system [10] allows simple access for information about issuers. One Member State (UK) recently started a system ensuring that all regulatory information on a particular issuer is channelled through regulatory news services. Other Member States seek improvements through publication on the web site of their national securities regulators.

[10] EDGAR is the abbreviation for Electronic Data Gathering, Analysis, and Retrieval System and was introduced in 1993.

The proposed Directive would make sure that each Member State operates a system for disseminating information on a particular issuer at a single source. Such a source may also be the issuer's Internet sites, accompanied by an efficient electronic alert system. However, this does not offer a solution on how to connect national systems throughout the European Union or across a maximum of Member States. It should be up to the national securities regulators to establish an inventory of financial information, for which Community-wide solutions should be sought through guidelines. The guidelines could usefully be drawn up as Level 3 type measures under the Lamfalussy process and should aim at establishing electronic networks to which investors throughout Europe could have real-time access. Any system leading to one stop shop solutions across all or lots of Member States or a system of mutual recognition of the means which each Member State has recognised as appropriate at national level should be left to national regulators at this stage. This soft law approach should lead to practical solutions designed for the benefit of investors. By 31 December 2006, the Commission will review how these measures are working in practice and, if necessary, propose Level 2 legislation.

For further details, see the explanations given on the proposed Article 18.

3.3. Developments in the US

US legislation on transparency sets the scene for the most important capital markets in the world. US stock markets cover about 60% of the world stock market capitalisation whereas European markets only half of it (30%). The collapse of US companies like Enron and Worldcom have added fuel to the debate in Europe. The Sarbanes-Oxley-Act adopted in July 2002 led to the most profound reform of US securities markets legislation for the last decades.

It is also accompanied by measures [11] taken by the US Securities Exchange Commission (SEC) which further strengthen investor protection: Directors (and their financial officers) have to certify that every future quarterly and annual financial report does not contain any untrue statement, but fairly represent the financial conditions of the issuer, including the maintenance and certification of an internal control system. This is the legislative response to widespread criticism that financial statements were subject of manipulation, even fraud. The certification requirement will also apply to foreign securities issuers. Moreover, US companies whose equity public float is $75 million or more and who are subject to the SEC for at least 12 month will face an acceleration of its filing requirements of quarterly and annual reports [12] and will be required to publish their reports on the Internet.

[11] SEC Decision of 27 August 2002.

[12] At present, all US domestic security issuers are required to publish the annual financial report (form 10-K) by 90 days after a fiscal year end. The companies concerned should accelerate this during a period of two years (75 days after the fiscal year ending in 2003 and thereafter 60 days after the subsequent fiscal years for ). The quarterly financial report (form 10-Q) should be published in 45 days. The companies concerned by the new rules should speed publication up to 40 days as from 2005 and 35 days as from 2006.

These measures do not only impact on European companies having a dual listing on US securities markets. They set a pace against which Community legislation must find a proper response for promoting European capital markets at international level. The Commission proposal indeed addresses these issues: First it overhauls the requirements for annual and interim financial reporting (see sections 4.2. to 4.4. below). In addition and along the same lines as in the future directive on prospectus, the Commission proposes that Member States have in place adequate rules on identification of the responsible persons and bodies in a company and their liability for false information (see for further explanations given to Article 7 in Section 5).

4. KEY ELEMENTS OF A REFORM OF DISCLOSURE REQUIREMENTS

4.1. Community-wide investor protection and removal of national barriers

4.1.1. Striking a balance between issuers and investors

The envisaged transparency requirements are placed in the context of integrated European capital market. This should not only protect investors and improve market efficiency. Upgraded requirements throughout the European Union should lead to fewer national barriers for issuers seeking access to regulated markets in Member States other than their home Member State. Forging a link between effective removal of national barriers to market access with appropriate investor protection at Community level is the way in which there has often been successful integration of financial markets - and it should also be the way forward.

This implies high level - rather than full - harmonisation, whereby the issuer's home Member State may continue to impose more stringent periodic or ongoing disclosure requirements. However, other Member States where issuers also wish to raise capital through securities admitted to trading on a regulated market should not be allowed the same. Otherwise, companies wanting to be quoted in several Member States would certainly be discouraged through diverging national disclosure requirements.

This balance between investor protection and removal of national barriers for issuers responds to concerns and wishes expressed in the two consultations. On the one hand, investors from some Member States and from third countries asserted that the appropriate way would be full harmonisation throughout the European Union. On the other hand, security issuers and market participants advocated that the Member States should retain some discretion.

For further details, see the explanations to Article 3 in Section 5.

4.1.2. Filing system in the home Member State

To build investor confidence, the home Member State would be responsible for enforcing Community disclosure requirements through a system requiring companies to file their information with the national securities regulator. During the two consultations, investors, national securities regulators, and stock exchanges supported this idea, provided delegation to the operators of regulated markets remains possible. Market participants and issuers, however, asked for further clarification of the exact objective of such a filing system.

The repository function that a national securities regulator (or the operator of a regulated market to which this could be delegated) should therefore fulfil would work as follows: filing at the date of the effective disclosure should for instance ensure that mandatory disclosure deadlines are respected. The proposed filing system would not necessarily imply a scrutiny of the information with respect to its completeness, accuracy, and comprehensibility. On the other hand, the supervisory authority in the home Member State should possess, as a minimum, the right to react to any violations of disclosure requirements.

The repository function of a competent authority would not mean that it also takes over the role of disclosing the filed information to the public on a real-time basis. It would be up to each competent authority to decide if they wish to offer such a service. If so, such a disclosure function should embrace disclosure of all periodic and ongoing information which a particular issuer must disclose under this Directive and under the Market Abuse Directive. Thus, a national regulator would also be required to offer a single source of information about a particular issuer.

For further details, see the explanations given on the proposed Articles 15, 17 and 20 under Section 5.

4.1.3. Determination of the home Member State

According to existing Community Law, the issuer's home Member State is the Member State the law of which governs it [13]. During the two consultations, some market participants expressed a preference for a free choice of the home Member State by the issuers, at least in certain cases. The solution that the Commission proposes follows, to the extent possible, the solution agreed by the Council on 5 November 2002 in the context of the proposed Prospectus Directive.

[13] Articles 105 and 11 of Directive 2001/34/EC.

- The need for consistency with the future Prospectus Directive

Disclosure requirements for secondary markets and efficient supervision of issuers in this respect should - as a first rule - not, as a matter of principle, be left to Member States different from those responsible for approving a prospectus. Otherwise, the positive effects of a European passport for issuing a prospectus could be put into question, in particular with respect to the use of languages. The publication of an annual financial report under this proposal and of an annual information to the prospectus is a further prominent example underlying the need for consistency. If for instance the home Member State was the State where the issuer's securities are mainly traded on a regulated market, the advantages for issuers under the future Prospectus Directive would be defeated through the back door of this proposal.

- The need for consistency beyond the Prospectus Directive

However, the solution used in the forthcoming Prospectus Directive cannot simply be copied. The example of an issuer whose shares are admitted to trading on a regulated market in Member State A whilst it issues debt securities only in the Member State B illustrates the problem. Copying the solution under the Prospectus Directive would lead to two home Member States for the same issuer: one for shares and one for debt securities. Having several home Member States would however prevent an efficient supervision across Europe, but also confront issuers with several sets of national requirements going beyond the Community requirements under this proposal.

As a conclusion, there is a need for consistency and co-ordination beyond the forthcoming Prospectus Directive. The only way forward to ensure such consistency is - as a second rule - not to fix a home Member State according to the type of security admitted to trading on a regulated market, but according to the issuer. Thus, the company which issues shares and debt securities would not have two home Member States, but a single one. The same applies to issuers of different types of securities; if an issuer issues debt securities with a denomination per unit both beyond EUR 50.000 and below EUR 50.000, there can only be a single home Member State. In brief, the home Member State would not be determined according to the particular type of security, but according to the particular issuer.

- Criteria for establishing a link between the issuer and a home Member State

The home Member State should be the country where according to the type of security the highest level of investor protection must be enforced. The current proposal indeed provides for higher transparency requirements for share issuers compared to debt security issuers (such as quarterly financial information, but also disclosure of the capital structure in the case of changes to major shareholdings etc). If the future prospectus directive and the current proposal are taken together, share issuers and issuers of debt security not reserved for wholesale markets face higher disclosure obligations aiming at a higher investor protection. The principles for determining the home Member State with regard to such securities should therefore apply to the issuer of such securities even if such issuer also issued debt securities for wholesale markets.

- How to deal with issuers of only debt securities, who may choose its home Member State?

A specific case concerns issuers of only high value debt securities (under the forthcoming Council common position securities with a denomination per unit equal or more than EUR 5000) who will benefit under the future Prospectus Directive from a choice amongst several Member States. The possibility to choose the home Member State should in principle not be taken away. However, the emphasis on investor protection and market efficiency under this proposal lies on ongoing and periodic requirements; i.e. supervision of compliance of transparency requirements over a certain time. As a consequence, such debt securities issuers should have the choice, but may alter their choice only after a certain period. The proposed three years period would be consistent with the current and the future requirements for issuers to have a three-years trade record in form of annual accounts preceding any request for admission to trading on a regulated market [14].

[14] See at present Article 44 of Directive 2001/34/EC which will not be changed by the future Prospectus Directive.

- Extending the approach to also establish a home Member State with respect to the disclosure of ad-hoc information under the Market Abuse Directive

There is no doubt that the Market Abuse Directive allows each Member State to intervene on grounds of insider dealings on its regulated markets. However, the Market Abuse Directive does not address in which Member State an issuer must disclose its information and in which language. The solution cannot be that the issuer should simply do so in all languages where its securities are traded on a regulated market and according to dissemination means prescribed in each of these Member States. A determination of the home Member State under this Directive will be pivotal to address these two questions. Since the current initiative also deals with ongoing information, the home Member State should be the same.

For further details, see the explanations under Articles 2 (1) (i) under Section 5.

4.2. Periodic reporting: the annual financial report

4.2.1. An annual financial report

During the two consultations, all parties concerned agreed in principle with the objectives of introducing a single document providing all information for a particular financial year under the title "annual financial report", and the principle of a deadline by which the annual financial report should have been published. Issuers sought clarification of the status of such a document. On the one hand, the annual financial report should not be the final version approved by shareholders in the annual general meeting. On the other hand, it should not offer limited information on the basis of abridged balance sheets for SMEs as under article 47 (2) of the Fourth Company Law Directive nor should it offer a preliminary information for financial markets which has not already been audited.

The annual financial report should constitute a complete source of financial information, comprising the financial statements and a management report. It should represent reliable information approved by the issuer's responsible persons or bodies (board of directors - or in countries with a dualistic structure - also seen by the supervisory board). It should also be subject to an audit report.

4.2.2. Three months to publish the annual financial report

Existing Community Law requires publicly traded companies to make available to the public, as soon as possible, its most recent annual accounts and its last annual reports, in accordance with standards laid down under the Company Law Directives. However, the timing for publishing annual financial information differs from Member State to Member State. In some Member States, issuers already have a deadline for the publication of the financial year end-results [15], whereas others ensure timely information for securities markets either by publication of preliminary or abridged annual results [16] or by a further interim report at the end of a financial year [17]. In effect, Community legislation does not recognise annual reporting as a capital market directed tool. The introduction of a maximum publication period would enable investors to oversee company performance across Member States.

[15] such as in German law, requiring directors to produce a report in three months (national corporate governance code even requires a publication in three months), or France, requiring a publication within 4 months except for publicly quoted companies which envisage to publish a prospectus and which are required to publish financial statements within three months.

[16] in the shape of preliminary accounts, such as in BE (3 months), DK (3 months), SW (2 months), FIN (3 months) or UK (4 months - although the Department for Trade and Industry suggested making mandatory publication of the annual financial statements and reports within a period of four months in a White Paper of July 2002).

[17] either a fourth quarterly report (IT) or a second half yearly report (ES).

The final deadline for disclosing an annual financial report to the public should be three months. In the light of the views expressed in response to the consultation, the Commission believes that this is the best solution. Initially, the Commission services explored with the public the deadline of two months. In the second consultation it considered a deadline of three months, provided that an interim report for the last quarter of the financial year had previously been produced. However, that idea of a fourth quarterly report was dropped to avoid creating disproportionate burdens in relation to the overall objective of bridging the gap between the last interim report (e.g. quarterly information to be published at the latest in November) and the annual financial report (e.g. at the latest at the end of March). Longer reporting periods would expose the public to a long period of uncertainty and would considerably increase the risk of selective disclosure between certain issuers and analysts. A period of four months would bear the risks that publicly traded companies may wish to "manage earnings" since the annual financial report should only be published in a period during which the proposed quarterly financial information related to the subsequent financial year should already be drawn up and published.

For further details (including transitional arrangements), please see the explanations given to Articles 5 and 26 under Section 5.

4.3. Quarterly financial information/half-yearly financial reports for share issuers

The Commission believes that a mix of less demanding quarterly financial information and more demanding half-yearly financial reports is the right way forward at this stage. There is no evidence that such a mixed policy approach will increase volatility on stock markets. This mix focuses on disclosure of historical facts and trends, and will not, per se, give rise to short-termism. Short-termism can, inter alia, be provoked by companies who post forecasts with analysts, or promise growth in earnings per share ("earnings guidance") at certain intervals and then modify them later. This is not the intent or the substance of the Commission proposal. Critical voices in the US [18] where this practice is widely used have already invited market participants to stop it.

[18] See the report of the Conference Board, Commission on Public Trust and Private Enterprise, Findings and Recommendations of 9 January 2003

4.3.1. Half-yearly financial report after the first six months

The half-yearly report which is at present required under Community law would therefore be upgraded to an interim report composed of a condensed set of financial statements to be established following IAS 34 and a management report on the company activities. The management report should only contain an update of the data contained in annual report, as required under the Fourth and Seventh Company Law Directives. In line with IAS 34, the half-yearly financial report should then be published after two months (rather than four months as today).

During the consultations, some issuers perceived an interim management report as a requirement only replicating for a reference period of six months what they should already produce on an annual basis at national level. This assumption is not correct. The Commission is proposing is merely an update, not a recasting of the last annual management report. The details of such update should be laid down in implementing rules in accordance with comitology rules.

A major concern which issuers expressed in the consultation relates to the phasing in of reporting according to IAS in the first relevant year - 2005. In order to facilitate this, the Commission proposes allowing Member States to exempt their security issuers from the application of IAS in the half-yearly financial report due in 2005. As a consequence, the first document that an issuer should prepare in accordance with international accounting standards would be the annual financial report following the financial year starting in 2005. In addition, exemptions for some issuers to start applying IAS at a later stage (in 2007) would be taken into account.

For further details, see also the explanations given for Articles 5 and 26.

4.3.2. Quarterly financial information

At present, Community law only requires half-yearly reports to be published on a company's profits and losses during the first six months of each financial year. However, ten Member States already have stricter requirements. This demonstrates that the Community's disclosure requirements lag behind, no longer reflect best practice and are clearly outdated.

- Why move to quarterly frequency in interim reporting?

Eight Member States (AUT, BE, ES, FR, FIN, GR, IT, PO) have made mandatory a quarterly frequency in interim reporting or interim information on all or certain regulated markets. Two Member States require quarterly reporting for young companies with a track record of less than three years (LUX, UK) and for investment companies holding strategic minority stakes in other companies (UK). In two other Member States (DE and SW [19]), stock exchange rules have introduced de facto quarterly reporting, in a further Member State (NL), stock exchange rules will do so [20]. Once introduced, nobody ever returned to a system of only half-yearly reporting.

[19] under the rules of the Deutsche Börse for all DAX, M-DAX companies (as from 2003, this should be the rule for all companies quoted in the new prime segment) and those traded on the Neuer Markt and under the rules of the Stockholm Stock Exchange.

[20] under Euronext rules for the segments Next Economy and Next Prime as from 1 January 2004.

About 1100 out of 6000 publicly traded European companies [21] provide interim reports on a quarterly basis following high international standards for each quarterly report (national GAAP, IAS or US-GAAP), many more publicly traded companies provide at least information in a quarterly frequency. Although being a minority amongst all publicly traded European stocks, European companies producing quarterly financial reports dominate stock indices in important Member States (DAX, MIB, IBEX, CAC, and also the techMark segment on the LSE).

[21] According to Bloomberg data in 2002.

In addition, it is undeniable that European securities markets very much depend on US securities markets, where quarterly financial reporting has been required since 1946. US stock markets cover about 60% of world stock markets' capitalisation whereas European securities markets account for only 30%. Trends on European markets highly depend on developments in US markets. Many European publicly-traded companies having doubts about quarterly reporting should be aware that trends on US markets, strongly influence developments in European securities markets, more so than the performance of European companies. Introducing quarterly financial information should be part of our efforts to persuade international investors to diversify further their investments across world stock markets.

The provision of quarterly financial information to the public offers issuers the opportunity to enhance their own stock performance. Were this the only argument in favour, however, it would point towards leaving companies to do so on a voluntary basis. But beyond this reason, mandatory quarterly financial information should provide better investor protection, since investors are likely to monitor publicly traded companies' debt more closely. In the Member States, company indebtedness as a proportion of GDP has risen considerably risen in recent years [22]. Moreover, the availability of more structured and reliable information over a financial year would increase market efficiency and competition, as capital would be allocated to the best-performing companies. Companies could in addition be judged on the basis of readily comparable publicly available information, rather than the investor being left to rely on financial analysts' forecasts. There is no empirical evidence pointing toward a link associating mandatory quarterly financial information with increased stock-market volatility.

[22] See in particular the recent report of the Conseil des Marchés Financiers of December 2002 "L'augmentation de la volatilité du marché des actions"

- Outcome of the consultation

During the two consecutive consultations, the quarterly frequency in interim reporting was the issue dividing issuers and investors in particular. It should be noted that a minority of companies who are not yet subject to mandatory quarterly reporting agree with the principle while a minority of investors have cast doubt on the use of quarterly reporting:

Some issuers who do not already report on a quarterly basis fear that such frequency would undermine their long term investment strategy - a view which was not supported by those companies already reporting on a quarterly basis. The Commission also believes that this fear is not justified. Instead, publicly-traded companies which do not report on a quarterly basis will essentially be driven by other market forces, although improved business performance might be the reward as a result of generated investor confidence. Many companies suggested leaving quarterly reporting to the discretion of each company concerned. However, the Commission is of the opinion that given the growing importance of corporate governance, transparency rules should no longer be shaped in a way allowing companies free choice over whether they wish to stick to the principle of transparency or not.

Some parties asserted that disclosure of price sensitive information on an ad hoc basis (ad hoc disclosure) would be far better adapted to the information needs of investors. However, periodic reporting and ad hoc disclosure of inside information (under the future Market Abuse Directive) are different ways of informing the public and not substitutes. Disclosure of inside information to the public on an ad-hoc basis is left to the discretion of the issuer, e.g. it is considered as legitimate (and represents widespread practice) not to divulge the consolidated figures or even internal reporting results usually established within companies. In contrast, periodic reporting requirements provided for under legislation or under stock exchange rules entitle investors to receive standardised and hence comparable information (such as profit and loss before and after tax) from issuers.

Advantages for investors must in particular be measured depending on their location in Europe or in a third country. Investors who are situated in the same country where the issuer's securities are admitted to trading on a regulated market need less standardised information published at a pre-fixed date. Investors situated abroad would have a simpler access to information about issuers the more standardised the reporting periods are. Quarterly reporting offers therefore clear benefits to investors situated abroad.

Some stock exchanges (but not the majority) also suggested leaving this issue to the operators of a regulated market. However, quarterly reporting is a quality property at a world wide level, real differences between stock markets only exist on the modalities, such as the format and time limits for a quarterly financial report. More importantly, ten Member States already have taken legislative action. It is difficult to conceive a scenario that Member States would admit issuers' securities to its regulated markets, or that investors in those countries would be interested in such issuers, without reliable quarterly financial information. Fragmentation, and not integration, of regulated markets would be the result if the Community failed to address this issue.

In its second consultation document, the Commission services also launched the idea of a different regime for smaller security issuers based on their annual turnover. Some argued that an SME regime could be better based on market capitalisation. Certain stock exchanges even favoured a total exemption for SMEs, the scope of which might be defined by investors, auditors and accountants. However, institutional and retail investors, auditors, and accountants opposed that idea . The reward/risk profile of smaller companies, in particular start-up companies, would not justify this.

It must be borne in mind that publicly quoted companies are not micro-enterprises, either with respect to their size, their activities, or their market capitalisation. Moreover, they are built on capital which they have received from the public, i.e. from institutional or retail investors. A reliable internal accounting system is pivotal for the credibility and the competitiveness of SMEs.

In general, capital markets consider investments in SMEs as risky. This is a clear message from the consultation carried out by the Commission. Providing reliable information on a quarterly basis has therefore clear benefits for SMEs: this will help to create more market and investor confidence. This may be particularly so with regard to cross-border investors. For example, in France, statistics show that a non resident investor holds shares on average only for five months (compared to eleven months for resident investors [23].

[23] Banque de France, Bulletin de la Banque de France, No 106 - October 2002 concering the duration of holdership of shares between June 2001 and June 2002

- The proposed solution: quarterly financial information

The Commission follows an idea that many respondents put forward: quarterly financial information composed of those key data currently required under existing Community law for half yearly reporting (net turnover, profit and loss before or after deduction of tax), plus a trend information on the future company development. Such information should enable investors not only to judge on the basis of achieved results, but also to take due account of any long-term strategy, which an issuer currently pursues. It cannot be ignored that a demand for information on the future company performance exists. However, there is no public interest in promoting a kind of "earnings guidance" leading to short termism and undue pressure by analysts and fund managers. Instead, the trend information which is optional for companies would allow them to update their views on the company strategy and the development of its activities. The maximum publication deadline for such a quarterly financial information should at this stage not go beyond two months. If investors wish more detailed information or the same information more swiftly, issuers and operators of regulated markets would still retain the possibility to find a response to this.

The proposed solution would not involve extensive costs for companies, in particular since it does not require the establishment of cash flow statements on a quarterly basis or the involvement of an auditor to audit or review the accounts. In addition, issuers have the choice between an information about the profit and loss before or after tax so that an issuer is not required to make tax estimates over a financial year. The turnover and profit and loss figures are maintained and updated on a regular basis (at least monthly) for operating purposes, therefore, this information should be readily available.

A quarterly frequency of information about profit and loss offers a tool for measuring any fraudulent practices in all periodic reports. However, it will not, of itself, combat fraudulent accounting practices within companies. Further measures have been suggested in the Final Report of the High Level Group of Company Law Experts [24]. The Commission intends to follow-up on these suggestions in the coming months in an Action Plan on Corporate Governance and a Communication on Statutory Audit.

[24] Report of 4 November 2002

Information on profit and loss before or after tax in addition to turn-over, is a key element for investors. Such information provides a reliable insight into the financial situation and health of a publicly traded company. Information on the net turnover, as such, does not suffice because it does not allow an assessment of the debt situation of a company.

The proposed solution does not follow the highest existing national standards on quarterly reporting. At present, in EL, UK, LUX, PO the mandatory quarterly report comprises not only net turnover and profit and loss before or after tax, but a financial statement which includes a cash flow statement, as well as a management report. Stock exchange rules in AUT (Vienna Stock Exchange), DE (Deutsche Börse), FIN (Helsinki Stock Exchange), SW (Stockholm Stock Exchange) also require such financial statements on a quarterly basis; as from Jan 2004, Euronext will introduce the same high level requirements with an impact on the companies quoted in FR, BE, NL. France already requires quarterly information on turn-over, but not on profit and loss. The Commission proposal does not seek to adapt the current acquis to the highest international standards, but merely bridges what is currently a significant gap between 1100 companies in Europe which comply with the highest international standards with shorter publication deadlines and the remaining 4900 companies.

For further explanations, see the comments to the proposed article 6 under section 5.

4.4. Only half-yearly financial reporting for issuers of securities other than shares

Issuers of only debt securities are not subject to any interim reporting under existing Community Law. This should be changed. A half-yearly financial report should be required, the contents of which should correspond to those required from share issuers. Indeed, it should not be underestimated that insolvency has adverse effects both for an investor in shares and for one in debt securities. Therefore, some action is needed to protect those investing in such issuers' debt securities and to maintain a level playing field between share issuers and debt securities issuers. As widely supported in the two consultation rounds, it is proposed to impose fewer requirements compared to those for share issuers. A half-yearly financial report should not be imposed on companies, which only issue debt securities with a high denomination per unit, in particular issuers of Eurobonds. There is not the same need for investor protection along the same lines and for the same reasons as in the amended Commission proposal for a prospectus directive.

During the two consultations, some argued that the current system of disclosure of price sensitive information would be sufficient to protect investors. The Commission does not share this view, in the same way that it does not in the case of quarterly financial information for share issuers. Half-yearly financial reports represent important information for capital markets beyond ratings offered by rating agencies. In the United States, debt security issuers are even subject to quarterly financial reporting requirements. The Commission also feels unjustified requests for exempting subsidiaries from half-yearly reporting. It should be borne in mind that such subsidiaries act as proper issuer of debt securities on regulated markets and that the consolidated accounts of the parent undertaking only provide information on the performance of the entire parent undertaking, but not on the performance of such a subsidiary acting as a genuine debt securities issuer on its own.

For further details, see the explanations to the proposed articles 5 and 8 under section 5.

4.5. Disclosure of changes to major shareholdings in security issuers

4.5.1. More disclosure thresholds to further integrate European securities markets

The existing Community law provides that a person acquiring or disposing of shares so that its holding with a publicly traded company reaches, exceeds or falls below certain thresholds informs the company, which is in its turn responsible for disclosing this information to the public. Those thresholds are currently 10%, 20% and 1/3 (or, at the Member State's choice, 25% instead of those two last thresholds), 50%, and 2/3 (or, again at a Member States' discretion, 75% instead of 2/3). These thresholds are shaped in a way reflecting differences in national company law on issues such as the thresholds necessary to represent blocking minorities on annual shareholder meetings, to achieve changes to the company's statutes or exercising special rights, such as nomination of special auditors, etc.

Twelve Member States have meanwhile introduced further thresholds. Indeed, only three Member States (LUX, PO and SW) abide by requiring a transparency level, which persists still at Community thresholds, established 15 years ago. The Committee of European Securities Regulators (CESR) also launched a discussion for overhauling Community thresholds [25], which the Commission carried forward in its proper consultations. During the consultations, interested parties requested an update, even an overhaul of these requirements.

[25] CESR paper on "Measures to promote market integrity - a follow-up to CESR paper on market abuse of 31 January 2002 (FESCO/01-052h of 31 January 2002).

The Commission now proposes introducing a transparency system on the basis of steps starting at a first threshold of 5% [26], continuing at intervals of 5% until 30% of the voting rights or the capital or both. This system would reflect not only the actual influence an investor on securities markets may take in a publicly traded company, but more generally its major interest in the company performance, business strategy and earnings. Already seven Member States apply such a more securities market directed transparency regime at national level. Six of them (AUT [27], DK, ES [28], FIN, GR [29], IT [30], and UK [31]) introduced this by law or regulations, the seventh apply this through recommendations by the stock exchange (SW). A further - eighth - Member State (NL [32]) is about to follow the same route. The Commission proposal would align the situation amongst Member States whilst allowing those which wish to do so to require disclosure of ownership already at an earlier stage (2% in IT or 3% in UK) or at closer intervals. Other Member States may also maintain further thresholds at national level, such as 1/3 of the voting rights.

[26] This threshold must already be respected in 12 Member States (AUT, BE, DK, DE, ES, FIN, FR, GR, IRL, IT, NL, and UK).

[27] Transparency requirements start at 5%, continues in steps of 5% until an investor reaches 50% of the voting rights.

[28] Transparency is required in the case of a shareholding starting at 5% and continues to apply whenever a holding reaches, exceeds or falls below a subsequent 5% threshold.

[29] During the first 12 months of trading shares admitted to a regulated market, changes in shareholdings at intervals of 1.5% should be reported.

[30] Transparency requirements start at 2% and continue for shareholdings subsequently increasing or decreasing of more than 5%, 7.5%, 10%, and any further 5% step.

[31] Transparency requirements start at 3% and continue for shareholdings subsequently decreasing or increasing through a whole percentage figure.

[32] The Dutch Ministry of Finance plans to propose amending the "Wet melding zeggenschap in ter beurze genoteerde vennootschappen" of 1996, including a new threshold structure (5%, 10%, 15%, 20%, 25% and in case of a holding of more than 25% the obligation to notify each transaction).

For further information, please see the comments on the proposed Articles 9 and 10 under Section 5.

4.5.2. Shortening time limits for shareholders and issuers to act

Shortening notification and disclosure deadlines is also in line with wishes expressed in the consultation. At present, the shareholder is required to inform the issuer and the competent authority in seven calendar days, and subsequently the issuer should inform the public in nine calendar days, or in specific circumstances in 21 calendar days. In contrast to the five calendar days initially envisaged, the Commission now proposes a time limit of five business days for investors and a time limit of three business days for issuers which effectively dispose of information on important changes on shareholders share acquisitions or disposals to disclose these modifications (see also the explanations to the proposed Article 11 under section 5).

4.5.3. Transparency also about holdings in securities giving access to shares

Influence may be directly exercised on companies through shares, but also indirectly through financial instruments conferring the right to acquire or sell shares, such as warrants or convertible bonds if the holding of such financial instruments reaches important thresholds. In the responses to the consultations, there was support for the idea of including such a situation in the general transparency system. However, there were particular concerns on the inclusion of call and put options. Moreover, a minority of investment companies requested higher thresholds compared to other investors. To meet these concerns, the Commission proposes to take the following line:

The overall goal of moving towards more capital market-oriented thinking should not be undermined by exceptions for investment companies. Companies have a strong interest to know which investment companies invest in them and what their position is, for instance in shareholder meetings. The notification requirement would therefore make it easier for companies to identify the ownership or the persons acting on behalf of owners. That said, in general, the Commission considers it acceptable to allow each Member State to decide whether it sets 10% as the first threshold where investment companies (but also other investors) only acquire covered warrants or convertible bonds. The same proportionality rule would apply to life interests linked to shares. In addition, the notification and disclosure regime would be limited to derivative securities, but not all kind of derivatives, such as options.

For more explanations please see the comments on Articles 2 (1) (e) and 9 under Section 5.

4.6. Information of security holders on general meetings

4.6.1. Why is the issue covered under this initiative?

This issues is already covered by Community legislation on securities markets, rather than by Company Law Directives [33], and need modernising in three ways:

[33] see Articles 65, 78 and 83 of Directive 2001/34/EC for issuers of shares, corporate and sovereign debts.

Firstly, the use of proxies should be facilitated. Allowing shareholders to act via proxies would enhance shareholder involvement in general meetings. It would in particular help investors situated abroad, and which are not in the same position as domestic investors to travel, to exercise their rights. The responses to the consultation were clearly in favour of allowing proxy voting through a Community measure across all the Member States. However, the present proposal only deals with the transparency aspects.

Secondly, the use of electronic means should be facilitated. Allowing the provision of information by electronic means is strongly linked to the capacity of all the Member States to take account of the advantages of modern information and communications technology. The Commission suggests that each publicly traded company should receive the necessary regulatory support to submit this important question to its shareholders, who should decide on the modalities for online information in a general meeting.

For further explanations, see the comments to Articles 13 and 14 under section 5.

5. COMMENTS ON SPECIFIC ARTICLES

The current information requirements are laid down in Directive 2001/34/EC [34] transparency, which codified amongst others Community rules which have been in force for more than 20 years (on annual financial reporting and on shareholder meetings [35]), nearly 20 years (on interim financial reporting [36]), or at least nearly 15 years (on disclosure on the acquisition or disposal of major holdings [37]). However, this codification did not require any amendments in the laws and regulations in the Member States compared to the past.

[34] Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities, OJ No L 184 of 6.7.2001.

[35] Articles 64 to 69 and 78 to 84 respectively replaced the former Schedules C and D of the Directive 79/279/EEC.

[36] Articles 70 to 77 and 102 to 107 respectively replaced the former Directive 82/121/EEC.

[37] Thus, Articles 85 to 97 replaced Directive 88/627/EEC.

5.1. Recitals

Recitals 19 to 24 recall the new way for regulating securities markets (cf. section 2.2 above).

5.2. Chapter I: General provisions

5.2.1. Article 1 - Subject-matter and scope

The current exemption for undertakings for collective investment in transferable securities (UCITS) is maintained in Article 1 (2), in particular since specific requirements are laid down elsewhere [38]. Articles 2 (2), 3 (2), and 85 (3) of Directive 2001/34/EC already provide for such exemption under the existing acquis.

[38] Council Directive 85/611/EEC of 20.12.1985 on the co-ordination of laws, regulations and administrative provisions relating to the undertaking for collective investment in transferable securities (UCITS), as last amended by Directives 2001/107/EC and 2001/108/EEC of the European Parliament and of the Council of 21 January 2002 (OJ No L 41, 13.2.2002, p. 20 and 34 respectively).

5.2.2. Article 2 - Definitions

5.2.2.1. Article 2 (1)

On (a): The definition of securities builds on the solution that the Council agreed on 5 November towards the common position on the future prospectus directive. It therefore excludes money market instruments which may remain subject to national legislation.

On (b): A definition is necessary to ensure that issuers of convertible or exchangeable bonds are not required to hold general meetings under the proposed Article 14. In contrast, the Commission does not see any need for the definition of "equity securities" or even "shares". It is certainly necessary to differentiate between equity and non-equity securities under the future Prospectus Directive with regard to derivative securities (e.g. convertible bonds would fall under equity securities whereas exchangeable bonds would be treated as non-equity securities in the future Prospectus Directive). That said, such a need does not exist for the present proposal. Indeed, a publicly traded company which issues only derivative securities on regulated markets, but not the securities (shares and debt securities) from which such derivative securities flow from is not possible.

On c): see already Section 3.1

On (d): the definition includes the entire range of security issuers, including issuers of sovereign debts and issuers of certain bonds (including Eurobonds) for which, however, important exemptions from periodic disclosure requirements are provided for in Article 8. In addition, it clarifies the treatment of depository receipts thereby incorporating Article 6 (3) of Directive 2001/34/EC.

On (e): The definition of "security holder" has been introduced to clarify who is responsible for notifying changes to major shareholdings with security issuers, but also to clarify rights of equal treatment in the context of general meetings. The second sub-paragraph builds on Article 92 (a) of Directive 2001/34/EC and covers the case of custodian banks and investment funds holding securities in their own name, but on behalf of their clients. The third sub-paragraph clarifies the situation with respect to depository receipts and thus integrates Article 85 (2) of Directive 2001/34/EC. The fourth sub-paragraph extends the definition to holders of derivative securities, such as convertible or exchangeable bonds (but not options - see also section 4.5.3 above); this extension is of important for disclosure of changes to major shareholdings.

On (f) and Article 2 (2): This definition should be seen in the context of disclosure of changes to major shareholdings with issuers. The overall objective must be to ensure that the parent undertaking is required to inform about its own holdings, as well as the holdings of its controlled undertakings. The current definition of "controlled undertaking" in Article 87 of Directive 2001/34/EC should be extended to take into account views expressed in the second consultation.

On ( i ), see already Section 4.1.3. above.

On (k), the definition of "regulated information" is of particular relevance for Articles 15 to 17.

On (l), the definition of "electronic means" builds on the definition already established under Directive 98/34/EC, as amended by Directive 98/48/EC [39]. It does not include off-line communication, such as distribution of CD-ROM's, or communication not provided by electronic processing, such as telephony services, telefax or telex. Delegation should be given to the Commission to clarify the definition along these lines.

[39] Directive 98/34/EC (OJ No L 204, 21.7.1998, page 37), as amended by Directive 98/48/EC (OJ No L 217, 5.8.1998, page 18)

5.2.3. Article 3 - Integration of securities markets

Acceptance of these provisions should be the proof where the present initiative leads to more integrated securities markets (cf. Section 4.1.1. above).

At present, Article 8 (2) of Directive 2001/34/EC allows any Member State to introduce more stringent disclosure requirements, unless this leads to discriminations of foreign issuers. In contrast, the 20 years-old acquis still recognises that compliance with Community transparency requirements does not necessarily provide guarantees enabling Member States to lift further national restrictions.

In future, only the home Member State should be able to continue to block admission of securities to trading on a regulated market in internal situations where any cross-border dimension on the issuer's side is missing. On the other hand, investors should continue to be protected - as under the existing Community law (see Article 8 (3) of Directive 2001/34/EC - in that no Member State may in general exempt issuers or security holders from Community requirements or introduce less stringent requirements.

Following wishes and concerns expressed in the consultation, the proposed wording in Article 3 (2) also clarifies the value added of the harmonisation of disclosure of price sensitive information under the future Market Abuse Directive: if an issuer complies with these provisions, there is no overriding reason for preventing it from access to regulated markets in other Member States.

Integration of securities markets should be promoted along the same line for disclosure of major shareholdings (see Article 88 of Directive 2001/34/EC). However, the security issuer's home Member State may continue to provide for additional thresholds, closer notification and disclosure deadlines, or other stricter rules than those required under the proposed Directive.

5.3. Chapter II: Periodic information

5.3.1. Article 4 - Annual financial reports

The objectives of this provision are explained in section 4.2. The proposed wording would replace Articles 67 and 75 of Directive 2001/34/EC with regard to the following technical aspects:

- It intends to clarify terminology in line with international accounting standards. The so-called annual financial report should have two components: financial statements (the so-called annual accounts under the Fourth and Seven Company Law Directives) and the management report (which carries the denomination as annual report under the same Company Law Directives).

- The financial statements should be subject to an auditor's report. The position of the auditor should be reproduced. The proposed wording is in line with the Fourth and Seventh Company Law Directives.

- The annual financial report should allow appropriate identification of the persons responsible. Investors should be put into the position to know who effectively bears the final responsibility for the information given. This forges a strong link with Article 4 (see also Section 3.4.)

5.3.2. Article 5 - Half-yearly financial reports

See Sections 4.3.2 for share issuers and 4.4. for debt securities issuers

This provision applies to issuers of all kind of securities. It does not include an obligation for issuers to let such reports review by auditors. At this stage, the Commission follows a majority of the responses, which do not see an immediate need to make it mandatory at Community level. The issuer's home Member State may impose it according to the proposed Article 3 (2).

That said, the Commission should be allowed to take action if necessary under the comitology procedure. The fast track procedure recommended by the Committee of Wise Men, chaired by A. Lamfalussy, should be used to enable the European Institutions to rapidly restore investor confidence in critical phases once the proposed corporate interim reporting does not ensure reliability on its own.

5.3.3. Article 6 - Quarterly financial information

See the general explanations given under Section 4.3.1.

The quarterly financial information does not need to comply with IAS 34. Therefore, the text no longer refers to a quarterly financial report or financial statements - a term reserved for interim reports based on IAS. The comitology procedure should again enable the European Commission, in co-operation with the European Securities Committee and upon the advice of the Committee of European Securities Regulators, to clarify for issuers, market participants and investors the contents of a quarterly financial information, to set deadlines for keeping published information available for the public and to clarify what type of review carried out by auditors upon the issuer's request requires public disclosure.

5.3.4. Article 7 - Responsibility and liability

Similar provisions are provided for in the Commission's amended proposal for a directive on prospectus. See also section 3.4. Liability for misleading or inaccurate information to be disclosed on an ad-hoc basis under the future Market Abuse Directive remains within the realm of national law.

5.3.5. Article 8 - Exemptions

Sovereign debts issuers should be subject to a lighter transparency regime because periodic reporting requirements would not apply (see already Article 2 (2) (b), Article 3 (2) (b) and Article 4 (3) of Directive 2001/34/EC). However, they should both benefit and be subject to overall general disclosure provisions, such as prohibition of the imposition of further requirements on them by Member States other than the home Member State (Article 3) or the need for guaranteeing effective and simultaneous disclosure of any information to be disclosed according to Article 17. They also remain required to ensure equal treatment of holders of debt securities ranking pari passu as proposed in Article 14 (see also Article 83 of Directive 2001/34/EC).

Along the same line, limited investor protection is foreseen for companies, which solely issue securities more particularly intended for professional investors (as determined by the par value of at least EUR 50.000). Thus, the Commission is following the political agreement reached by the Council on 5 November towards a common position on the future Directive on prospectuses.

5.4. Chapter III: Ongoing information

5.4.1. Article 9 - Notification of the acquisition or disposal of major holdings

The objective for providing a more stringent notification regime based on a higher number of thresholds was already explained in Section 4.5.1. In the light of the reactions received, the Commission decided not to propose ten thresholds as in its consultation document, but eight. Member States remain free to provide for further thresholds, in particular lower ones (such as in the UK (3%) or in IT (2%)). Article 89 (1) of Directive 2001/34/EC allows Member States to decide whether a company must also be informed in respect of the proportion of capital held by an investor where a Member State does not apply the principle of "one share, one vote".

On (a): Some responses cast doubt where derivatives allowing to acquire or to sell shares should be included in the notification regime. The Commission therefore limits the notification requirements to derivative securities. As a result, warrants or convertible bonds are included whereas options remain outside (see also Section 4.5.3. and Article 2 e)). In addition, it proposes to Member States to decide whether they want to set notification requirements already at a threshold of 5%. In the light of individual reactions received from national authorities, this possibility should also apply to life interests related to shares (see also Article 10).

Points b and c allow Member States to adapt two thresholds to their national rules allowing blocking minorities or qualified majorities in general meetings, but limit much more the discretion of Member States compared to Article 89 (1) (a) and (b) of Directive 2001/34/EC).

5.4.2. Article 10 - Determination of the voting rights

- Article 10 only specifies persons who may - legally or actually - exercise voting rights on behalf of securities holders. Whereas the holdings of an individual security holder might not necessarily meet the thresholds provided for, the situation may considerably differ with regard to custodian banks, investment funds, proxies and others who may exercise voting rights on behalf of numerous security holders.

- This provision is important for two reasons: first, publicly traded companies are informed not only about security holders, but also about those who may effectively exercise lots of influence; second, the provision aims at facilitating information between companies and security holders in the context of general meetings (see Articles 13 (3) and 14 (3)).

- This provision is essentially the same as Article 92 of Directive 2001/34/EC, subject to the following amendments in the light of the comments received in the consultation rounds.

- Limiting the definitions to those persons entitled to vote on behalf of shareholders requires deleting the current Article 92 (a), which is now incorporated into the definition of security holders under Article 2 (e) second indent. Article 10 a) corresponds to Article 92 c) of Directive 2001/34/EC. Equally, Article 10 b) reflects the current Article 92 d), Article 10 c) Article 92 e) - whereby the emphasis is placed on those to whom collateral [40] is given - and Article 10 d) Article 92 (f).

[40] The term "collateral" instead of "security" is preferable in the light of the terminology used in Directive 2002/47/EC of 6.6.2002 on financial collateral arrangements, OJ No L 168 of 27.6.2002, p.43.

- Following numerous requests, the determination of situations in which voting rights which may be exercised on behalf of controlled undertakings is much wider in Article 10 (e) compared to the current Article 92 (b). This is possible due to a wider definition laid down in the proposed Article 2 (f).

- The wording of Article 10 (f) corresponds to Article 92 (h). Article 10 (g) remains unchanged compared to Article 92 (g).

- The only new provision relates to proxies (Article 10(h)). Since proxy participation across Member States is generally allowed in general meetings , a company should be duly informed about major shareholdings for which a proxy received common instructions by a number of shareholders.

5.4.3. Article 11 - Procedures on the notification and disclosure of major holdings

Article 11 (1) clarifies the minimum contents of a notification to be made to a company. There is no corresponding provision in Directive 2001/34/EC. The Commission's initial suggestions to inform an issuer about the entire agreement between shareholders are no longer upheld in the light of reactions received in the two consultation rounds. However, issuers and the public have legitimate interests to be informed at least about the consideration given in return for those arrangements about voting rights.

Article 11 (2) reduces the notification period from seven calendar days to five business days. Referring to business days instead of calendar days is more adapted to the market reality and follows the view put forward by many interested parties. Longer notification periods which in particular banks with which securities are deposited may have under national law (in accordance with Article 92 last paragraph of Directive 2001/34/EC) should be abandoned. See also Article 26 on the transitional arrangements.

Article 11 (3) corresponds to Article 93 of Directive 2001/34/EC. Further exemptions which are currently provided for in Articles 94 (professional dealers) and 95 (disclosure contrary to the public interest or detrimental to the company) are outdated - a line with which a majority in the two consultation agreed. Several respondents took the view that the specific situations of major shareholdings during clearing and settlement processes would however deserve a specific treatment. The Commission has taken this view into account in the framework of the definition of security holdings under Article 2 e) second sub-paragraph.

Article 11 (4) corresponds to Article 91 of Directive 2001/34/EC, subject to a reduced disclosure period of three business days. This new disclosure deadline should be phased in under arrangements provided for in Article 28.

5.4.4. Article 12 - Additional information

Article 12 (a) corresponds to Article 66 (2) of Directive 2001/34/EC, Article 12 (b) and (c) to Article 81 (2) and (3) whilst extending these disclosure requirements to sovereign debt issuers.

5.4.5. Article 13 - Information for shareholders

Article 13 (1) corresponds to Article 65 (1) of Directive 2001/34/EC. In the light of several questions raised during the consultations, it is worth while noting that this wording never included a principle of "one share, one vote".

Article 13 (2) follows in essence Article 65 (2) of Directive 2001/34/EC. The only new element is included in letter b where a shareholder may choose a proxy in accordance with the law of the issuer's home Member State (see also section 4.6.2). However, there should be no need for selecting a proxy in each Member State. In letter d), the word "renunciation" should be replaced by "cancellation" following several responses asking for clarification of the existing wording (referring to "renunciation").

Article 13 (3) sets out minimum conditions under which electronic information of shareholders should become possible. The general objectives are set out in section 4.6.3 above.

5.4.6. Article 14 - Information for debt securities holders

Article 14 essentially contains the same provisions as for shareholders. However, rights attached to debt securities differ compared to those related to shares. Therefore, it is inevitable to have a specific provision for debt securities, as defined in the proposed Article 2 (b). In the light of numerous reactions in the two consultations, the Commission does no longer see a need for derogation from the principle of equal treatment on the grounds of social priorities, as currently provided in Articles 78 (1) 2nd subpara. and 83 (1) 2nd subpara. of Directive 2001/34/EC. Taking into account the particularities of Eurobond markets, Article 14 (3) allows issuers to choose the Member State in which they wish to hold a meeting with debt securities holders.

5.5. Chapter IV: General obligations

5.5.1. Article 15 - Home Member State control

The general policy which justifies a filing system in the home Member State was already explained in Section 4.1.2.. At present, Member States are only invited in broad terms "to ensure" that information is published (see e.g. Article 70 of Directive 2001/34/EC on half-yearly reports), save for the notification of changes to major shareholdings which should be communicated not only to the issuers, but also to the competent authorities (see Article 89 (1) of Directive 2001/34/EC).

The Commission should be authorised to adopt further technical implementing rules as follows:

- In particular, filing by electronic means must be ensured in future. Otherwise, filing conditions with national securities regulators would clearly lag behind electronic filing with company registers as proposed by the Commission for reforming the First Company Law Directive [41];

[41] Article 3 (2) of the Commission proposal for a Directive amending Council Directive 68/151/EEC, as regards disclosure requirements in respect of certain types of companies, COM (2002) 279 final of 3.6.2002.

- In the case of shares, a home Member State retains the competence for controlling the issuer even if the issuer's shares are admitted to trading only in another Member State. Implementing rules should shape in detail how to organise the control between the Member States concerned.

5.5.2. Article 16 - Language regime for issuers and security holders

The objectives for the proposed language regime are already set out in Section 3.2.1. The proposed wording endeavours to follow the line agreed in the Council on 5 November towards the adoption of a common position on the future directive on prospectuses. In addition, it imposes on issuers a requirement to disclose inside information - as provided for in Article 6 of the Market Abuse Directive (Directive 2003/6/EC) - under a specific language regime. Otherwise, issuers would be required to translate all the information to be published into the official languages of all Member States where its securities might possibly be traded.

However, there is an important difference to the future Prospectus Directive. The latter still allows host Member States to require a summary of a prospectus to be translated into its own official language. Such a summary is not a way forward under the present proposal. Instead, the present proposal deviates from the approach agreed for the future prospectus directive in two ways:

- Article 16 (3) does not leave issuers whose securities are admitted to trading in a regulated market solely in one host Member State, but nowhere else in the European Union a choice between certain languages; the host Member State may in principle impose the use of its own language. This rule should avoid "forum shopping" (or indeed "language shopping");

- Article 16 (6) ensures that national rules for the use of languages in judiciary proceedings are not affected.

As set out in Section 3.2.1. above, the proposed rules on the use of languages would not affect existing requirements under Article 4 of Council Directive 89/117/EEC (Eleventh Company Law Directive).

5.5.3. Article 17 - Timely and equivalent access to information

- Article 17 (1) and (2) would replace Article 102 of Directive 2001/34/EC to the extent that information to be disclosed to the public under this Directive is concerned. It will also determine in which Member State and by which means disclosure of price sensitive information should be achieved. See Section 3.2.2.

- Article 17 (4) empowers the Commission to further specify the conditions for disclosing information to the public on the issuer's internet sites, as well as keeping this information is available. This includes questions, such as whether the issuer should ensure that internet sites operate in a server located in a specific Member State or whether the use of specific dissemination means may also be imposed on issuers who did not request or approve admission of its securities to trading on that regulated market.

5.5.4. Article 18 - Guidelines

The underlying concept of this provision was already explained under section 3.2.2. Article 18 (1) (a) covers a specific aspect: The proposed filing system should not lead to unnecessary duplications for issuers who also remain subject to a filing under the First Company Law Directive [42]. In practice, this concerns in essence financial statements (accounts) and a management report (annual report. These types of information should be filed with national securities regulators according to the proposed Article 15, but at a later stage with the national company registers in accordance with Article 47 of the Fourth Company Law Directive/Article 38 of the Seventh Company Law Directive, in conjunction with Article 3 of the First Company Law Directive.

[42] Proposal for a Directive of the European Parliament and of the Council amending Council Directive 68/151/EEC, as regards disclosure requirements in respect of certain types of companies - COM (2002) 279 final of 3.6.2002.

5.5.5. Article 19 - Third countries

Article 19 (1) deals with issuers incorporated in third countries. Article 76 (4) of Directive 2001/34/EC already requires them to ensure equivalent interim reporting (based on half-yearly reports); the same applies to the disclosure of changes to major shareholdings by third country issuers under Article 68 (3) 2nd sub-paragraph of Directive 2001/34/EC. More favourable solutions for third country issuers to the detriment of European issuers should be avoided in future. This also includes requirements to provide quarterly financial information given that US-stock markets representing 60% of the market capitalisation in the world are already subject to even stricter disclosure requirements. In addition, this provision would pave the way for equivalence mechanism ensuring better protection for European holders of shares of third country issuers at the level provided for in Articles 13 and 14. However, the proposed equivalence rules only cover disclosure requirements laid down under this Directive, but not those incumbent on the issuer under the Market Abuse Directive.

Article 19 (2) builds on Articles 69 (2), 82 (2) and 84 (2) of Directive 2001/34/EC; it concerns both European and third country issuers. Article 19 (3) is a provision similar to that in the future directive on prospectus.

5.6. Chapter V: Co-operation amongst competent authorities

5.6.1. Article 20 - Competent Authorities

At present, Directive 2001/34/EC requires Member States to notify which the competent authorities are. The designation of a competent authority in each Member State answers the need for efficiency and clarity, and for enhanced co-operation between competent authorities. The administrative nature of these single competent authorities is necessary to avoid conflicts of interest in the use of financial disclosure data coming from quarterly financial information and annual financial reports. It will lead to greater consistency and clarity in the application of the provisions of the Directive.

Some national securities regulators and stock exchanges argued during the consultation that the tasks of the competent authority under this Directive (in particular the repository function) might be delegated to the operator of a regulated market in a Member State in accordance with the proposed Article 20 (2).

However, a permanent delegation would lead to a system whereby annual information under Article 10 of the future Prospectus Directive would be filed with the competent authority which may no longer delegate this function after the end of five years following the entry into force of the Prospectus Directive whilst the filing of all corporate information to be disclosed to the public on a periodic or ongoing basis would remain subject to a permanent delegation. If this option were pursued, security issuers would face a patchwork of national bodies (authorities and other bodies to which tasks are delegated). In the medium term, information should be filed with a single entity in each Member State, and not 30 to 40 bodies in fifteen Member States.

Pursuing this option would not create inconsistencies with the solution adopted under the Market Abuse Directive. Certainly, that Directive, in particular Article 12 (1) (c) allows delegation even in the long run. The present proposal addresses issues related to ad-hoc disclosure only in two respects: languages and dissemination of information. Decisions on the use of languages should be left to public authorities; control of efficient dissemination of information must clearly be separated from dissemination of information as such, which represents a profit-making activity in which operators of regulated markets also have own commercial stakes.

5.6.2. Articles 21 and 22

The obligation of professional secrecy for staff in national securities regulators should also allay concerns expressed by auditors in the consultations by auditors who are reluctant to provide information about clients.

5.7. Chapter VI: Implementing measures

5.7.1. Article 23 - European Securities Committee

The European Securities Committee should assist the Commission in accordance with the regulatory procedure laid down in Article 5 of the Council Decision on comitology (1999/468/EC). In addition, such decisions may only be taken within a period of four years, as agreed between the European Institutions in the context of the implementation of the recommendations of the Final Report of the Committee of Wise Men (see section 2.2. above).

5.8. Chapter VII: Transitional and final provisions

5.8.1. Article 26 - Transitional provisions

Article 26 (1) gives Member States the possibility for phasing in the new financial reporting requirements in two ways (see also Section 4.3.): It carries forward the exemption already provided for some companies issuing debt securities or reporting under US GAAP, as already foreseen in the Regulation on international accounting standards. In addition, Member States would be allowed not to impose on publicly traded companies to apply IAS already in the half-yearly financial report for the first six months in 2005.

Article 26 (2) provides for a smooth transition for investors and issuers who move from a system on disclosing changes to major shareholdings (see section 5.3.) which is less stringent than that under the proposed Directive. In practice, it would extend the disclosure deadlines for security holders and for issuers.

Article 26 (3) provides for a limited "grand-father" clause for issuers of debt securities who have benefited from the possibility offered by Article 27 of Directive 2001/34/EC. These issuers will be exempted from the obligation to publish half-yearly financial reports for a period of three years after the entry into force of the Directive, provided that the admission to trading of their debt securities was made before the entry into force of the Prospectus Directive which will repeal Article 27 of Directive 2001/34/EC.

2003/0045 (COD)

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the harmonisation of transparency requirements with regard to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Articles 44 and 95 thereof,

Having regard to the proposal from the Commission [43],

[43] OJ C ...

Having regard to the opinion of the European Economic and Social Committee [44],

[44] OJ C ...

Acting in accordance with the procedure laid down in Article 251 of the Treaty [45],

[45] Opinion of the European Parliament of ../../...., published in OJ --- and Council decision of ../../.... published in OJ ---

Whereas:

(1) Efficient and integrated securities markets contribute to a genuine single market in the Community and foster growth and job creation by better allocation of capital and by reducing costs. The disclosure of accurate and timely information about security issuers builds sustained investor confidence and allows an informed assessment of their business performance and assets thereby enhancing market efficiency. In addition, the security issuers' responsibility for the disclosure of information constitutes an indirect tool for promoting corporate governance throughout the Community.

(2) To that end, security issuers should ensure appropriate transparency towards investors through a regular flow of information. To the same end, security holders should also inform security issuers of the acquisition or disposal of major holdings in companies so that the latter are in a position to keep the public informed.

(3) The Commission Communication of 11 May 1999, entitled "Implementing the framework for financial markets: Action Plan" [46], identifies a series of actions that are needed in order to complete the single market for financial services. The Lisbon European Council of March 2000 called for the implementation of that Action Plan by 2005. The Action Plan stresses the need to draw up a Directive upgrading transparency requirements. That need was confirmed by the Barcelona European Council of March 2002.

[46] COM/99/232 final.

(4) Greater harmonisation of provisions of national law on periodic and ongoing information requirements for security issuers should lead to a high level of investor protection throughout the Community. However, this Directive does not affect existing Community legislation on units issued by collective investment undertakings other than the closed-end type, or on units acquired or disposed of through such undertakings.

(5) Supervision of an issuer for the purposes of this Directive would be best effected by the Member State in which the issuer has its registered office. In that respect, it is vital to ensure consistency with Directive [.../.../EC] of the European Parliament and the Council of [...] on the prospectus to be published when securities are offered