Opinion of the European Economic and Social Committee on the "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" (COM(2003) 138 final — 2003/0045 (COD))
Date: 2003-12-10
Institutions: European Economic and Social Committee
Subjects: ESC opinion, approximation of laws, dissemination of information, financial market, securities

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Opinion of the European Economic and Social Committee on the ‘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’

(COM(2003) 138 final — 2003/0045 (COD))

(2004/C 80/31)

On 8 April 2003 the Council decided to consult the European Economic and Social Committee, under
Article 262 of the Treaty establishing the European Economic Community, on the above-mentioned
proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 26 November
2003. The rapporteur was Mr Simon.

At its 404th plenary session on 10 and 11 December 2003 (meeting of 10 December) the European
Economic and Social Committee adopted the following opinion by 110 votes in favour, with one
abstention.

1. The Commission’s objectives

2. Key provisions of the draft directive

1.1.
The proposed Directive on Transparency in publicly
traded companies 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 proposal
is part of the programme launched by the
European institutions to make publicly traded companies more
transparent and to improve their financial and accounting
reporting standards. As well as this proposal for a directive,
the programme also includes the European Regulation obliging
listed companies to apply the International Accounting Stan-
dards (IAS/IFRS) from 1 January 2005; the Directive on Market
Abuse, which introduces new, more demanding requirements
for the publication of inside information and addresses the
issue of price manipulation; and the Prospectus Directive
which provides for a European passport and also at the same
time strengthens disclosure requirements in cases of public
issue and offers of securities or requests for the admission of
securities to trading on a regulated market.

1.2.
The proposed directive under discussion here deals
with periodic disclosure by issuers and the periodic provision
of information on changes to major holdings in companies.
Its declared aim is to improve investor protection and boost
market efficiency. To that end, it also seeks to ensure greater
openness to the world of international finance in terms of
use of languages and the more widespread use of modern
technologies to disseminate information. Lastly, the proposal,
although drawn up from 2000 onwards, seeks to offer a
response to US laws and regulations introduced following the
scandals that shook the financial markets two years ago,
including the Sarbanes-Oxley Act, in order to promote Euro-
pean capital markets.

As for the timetable involved, the Council is seeking

1.3.
adoption under the co-decision procedure in April 2004.

The first thing to note is that the proposed directive is
2.1.
based on the recommendations of the Lamfalussy report,
which advocates a four-level approach to regulation using the
co-decision procedure. Level 1, which is the subject of this
draft text, should focus on essential principles and options.
The Commission, assisted by a regulatory committee, the
European Securities Committee,
technical
implementing rules (level 2). Coordinated implementation of
these measures is a matter for the Committee of European
Securities Regulators (level 3) and enforcement of Community
law by the European Commission is also being strengthened
(level 4).

then adopts

2.2.
Thus, the proposed directive contains only the essential
provisions and, where appropriate, refers detailed questions of
enforcement to the Commission’s implementation measures.

2.3.
It is important to note that, although the proposed
procedure allows regulators to be responsive and flexible, it
does mean, as a result, that the texts have to provide for a
periodic review of the effective convergence of financial market
regulation in the Member States.

The main points of the proposed directive are as

2.4.
follows:

Scope: The proposed directive covers issuers whose
2.4.1.
securities are already admitted to trading on a regulated market
situated or operating within a Member State (and no longer
only issuers of securities admitted to official listing on such
markets).

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Deadline for the publication of the annual report:
2.4.2.
The companies concerned must disclose their annual report at
the latest three months after the end of the financial year.

2.4.3.
Publication of a half-yearly report: The proposed
directive requires issuers to disclose a detailed half-yearly
report for the first six months of the year, at the latest two
months after the end of the relevant period; the proposal also
specifies the content of that report.

2.5. Moreover, it must be borne in mind that the proposed
directive seeks not maximum, but minimum harmonisation.
A home Member State may impose additional reporting
requirements on issuers, but a host Member State may not.
We feel that this is one stage in the process but the goal
must continue to be maximum harmonisation. Minimum
harmonisation has some serious drawbacks in its biased
treatment of issuers and investors. So that the idea does not
remain mere wishful thinking, the Commission should, within
three years at the most, submit an action plan for achieving
this objective.

Publication of quarterly information: Issuers whose
2.4.4.
shares are admitted to trading on a regulated market must also
disclose, for the first and third quarter, their consolidated net
turnover figures, and the profit or loss before or after deduction
of tax, together with an explanatory statement. Such issuers
may, if they choose, also provide an indication of the likely
future development of their activities at least for the remaining
financial year. This information must be published at the latest
two months after the end of the quarter concerned.

2.4.5.
Notification of changes to major holdings: The
proposed directive increases the number of thresholds above
or below which security holders are obliged to notify the issuer
of the proportion of voting rights and capital they hold as a
result of the threshold having been crossed, and the issuer is
obliged to disclose that information.

2.4.6.
Dissemination of information to security holders by
electronic means: Home Member States must allow issuers the
use of electronic means to convey information to shareholders,
in particular, that such a decision is taken in a
provided,
general meeting.

Simplification of reporting requirements in terms of
2.4.7.
number of languages to be used: Where securities are admitted
to trading on a regulated market both in the home Member
State and in one or more host Member States, information
must be disclosed in a language accepted by the competent
authority in the home Member State and, depending on the
choice of the issuer, either in a language accepted by the
competent authority in the host Member State(s) or in a
language customary in the sphere of international finance. A
language customary in the sphere of international finance
may also be selected by the issuer in all cases where the
denomination per unit of the issued securities amounts to at
least 50 000 EUR, and by security holders when notifying any
breach of the thresholds.

3.

Issues raised by the proposed directive

3.1.
The proposal for a directive is by and large a technical
document and the European Economic and Social Committee
endorses its objectives. Improving the financial and accounting
transparency of publicly traded companies is a key element for
confidence in financial market operations. Moreover, greater
harmonisation of obligations incumbent on companies in this
regard is vital for the integration of European financial markets,
which is a goal of the Financial Services Action Plan. However,
the proposed directive does raise a number of issues, some on
matters of principle, other of a technical nature.

3.1.1.
Publication of quarterly information (Article 6): This
is a key issue of principle for the functioning of the financial
markets. The Commission feels that some degree of quarterly
financial and accounting disclosure is essential so that investors
are able to make appropriate choices and have equal access to
information. Moreover, the required information would be
limited since it would not include an income statement and a
balance sheet but simply data on turnover and profit or
loss before or after deduction of tax, thereby significantly
containing the costs involved. What is more, the Commission
does not feels that the disclosure of quarterly profit and loss
information would a priori increase volatility on the financial
markets.

3.1.1.1.
This issue is, however, the subject of genuine
debate. Companies, and especially the UNICE, are strongly
opposed to the mandatory publication of quarterly infor-
mation. Some institutional investors have stated that they had
not requested information of this kind. On the whole, investors
would prefer to see improvements in the quality rather than
an increase in the quantity of
the tremendous flow of
information they already have to deal with.

2.4.8.
Timely access to regulated information: Under the
proposed directive, the home Member State must require
issuers to use media that ensure the dissemination of regulated
information throughout its national territory and abroad. A
host Member State may not impose any requirements regard-
ing the use of any particular media, other than the issuer’s
Internet website.

3.1.1.2.
The mandatory publication of quarterly infor-
mation would also have a genuine cost impact on issuers, not
least SMEs. Above all, the widespread practice of quarterly
profit and loss reporting is liable to encourage investors to
adopt a more short-term approach. This might increase market
volatility and would also hamper the application of any long-
term strategy by companies required to justify their results
every three months. Such reporting would all too frequently

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divert managers from their operational responsibilities in order
to deal with communication matters, and would, as a result,
act as a disincentive for SMEs to have recourse to the market.
That would run counter to one of the goals of the Lamfalussy
plan.

consideration in determining the total capital and the total
voting rights and hence the proportion of voting rights and
capital held by other parties subject
to the notification
obligation. Therefore the inclusion of derivatives, whatever
their nature, in the notification obligation for major sharehold-
ings is not compatible with the system and should be deleted.

3.1.1.3.
In the light of all these objections, it would be
prudent to adopt a gradual approach, with an obligation only
to publish information on trends in turnover and activities for
the first and third quarters. The Commission would review the
situation after three years.

3.1.2. Monitoring information by the regulatory authorities
(Article 20): There are no plans at this stage to harmonise the
role of home Member States’ regulatory authorities with regard
to the reporting requirements under the proposed directive.
The regulatory authorities merely have to ensure that the
required information is disclosed within the appropriate
timeframes. The extent of regulatory authorities’ input varies
from Member State to Member State; some regulatory auth-
orities monitor the consistency or even the accuracy of the
information that has to be disclosed. As a result, there may be
a considerable degree of unequal treatment of issuers and
investors between Member States.

3.1.3.
Consistency of the definition of the home Member
State with the existing definition in the proposed Prospectus
Directive (Article 2) (1): Establishing the home Member State is
important both for issuers and investors, since it determines
the rules applicable to the issuer.

3.1.3.1.
The definition adopted in this proposed Directive
on Transparency is not wholly consistent with the definition
adopted in Article 2 of the Prospectus Directive. The threshold
for allowing debt securities issuers to select their home Member
State is set at a denomination of 5 000 EUR in the current
proposal, but at 1 000 EUR in the Prospectus Directive. For
the threshold in the
the rules to make sense, however,
Transparency Directive should be aligned with the threshold
in the Prospectus Directive.

Inclusion of derivatives in the notification obligation
3.1.4.
(Art. 2): Including derivative securities (warrants, convertible
or exchangeable bonds)
in the system for reporting the
proportion of voting rights and capital leads to difficulties in
calculating the proportion. In the case of warrants, a disclosure
obligation is not possible if the rights have not yet been
exercised.
In the case of convertible bonds, this leads to
difficulties if the related rights have not yet been exercised and
hence the underlying shares do not yet exist. In this case it will
be (a) impossible to determine a proportion for the relevant
instruments and (b) unclear to what extent such shares which
will only be issued in the future are to be taken into

(1) 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 — 2001/0117 (COD), adopted on 15 July 2003.

Deadline for the publication of the annual financial
3.1.5.
report (Article 4): Under Article 4, the issuer must disclose its
annual financial report to the public at the latest three months
after the end of the financial year. This deadline may prove
problematic given the requirement to publish the full audit
report alongside the annual report. This means publishing the
accounts as they have to be presented to the general share-
holder meeting. Many companies are unable to do that within
three months.

3.1.6.
Deadline for the publication of the half-yearly report
and the mandatory nature, or otherwise, of the audit of that
report (Article 5): Under Article 5, a half-yearly report must be
drawn up in line with international standards (IAS 34) within
two months of the end of the relevant six-month period.
However, this deadline is incompatible with an audit of the
half-yearly accounts for issuers who publish audited accounts.
For the record, the IASB recommends such a deadline only for
non-audited accounts. Moreover, Article 5(5) specifies that an
audit of the report might be made mandatory under the
committee procedure. Home Member States may also require
an audit. Such a potentially onerous obligation should not be
subject to the committee procedure.

Furthermore, as regards the content of the half-
3.1.6.1.
yearly report, a more precise definition would be required of
the term ‘management report’ which does not mean the same
thing in all Member States. In practice, it would be advisable
to require an update of the financial data contained in the last
management report in order to avoid making the obligations
for companies excessively cumbersome.

Notification of the acquisition or disposal of major
3.1.7.
holdings (Article 9): In practice, notification of this kind may
prove problematic for certain types of players, most notably
institutional investors. One issue, for instance, is the level,
within a particular group, at which the holdings of the various
asset management subsidiaries should be consolidated —
which, moreover, raises questions about the ‘Chinese walls’
that these players are supposed to put in place.

3.1.8.
Additional information to the public (Article 12):
Under this article, the issuer is obliged to inform the public
without delay of any changes in the rights of security holders
and any new loan issues. In the interest of legal certainty for
issuers, it would be a good idea to define what exactly is meant
by ‘without delay’, given that such questions are subject to a
general assembly decision. Whatever the timeframe, it may
only start following the decision of the competent body.

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Timely access to regulated information (Article 17):
3.1.9.
This is a key article highlighting the importance of timely
and efficient access to information at both national and
international
level. However, under Article 17(2), the host
Member State may require issuers ‘to alert any interested
person, without delay and free of charge, to any new disclosure
or any change to regulated information which has already
been published’. Such a requirement is too loose and, hence,
goes too far. For instance, even if it were done by Internet, the
obligation to alert any person on request could make it
necessary for companies to keep inordinately large, and costly,
data files. That would also open the door to acts of malice that
might jam up the system.

Sanctions (Article 24): Under Article 24, Member
3.1.10.
States are required to impose administrative sanctions in the
case of non-compliance with the provisions of this directive,
without prejudice to their right to impose penal sanctions. On
the face of it, however, this raises a fundamental difficulty in
respect of the European Convention on Human Rights, since,
given the similar nature of administrative and penal sanctions,
applying them both together violates the ne bis in idem
principle.

PROPOSALS

Chapter I — Article 2 (1)(e)(iv)

Inclusion of derivative securities in the notification obligation

1(e)(iv)

derivative securities entitling a natural person
or legal entity to acquire, on its initiative, or
to dispose of, on the sole initiative of a third
party, shares to which voting rights with the
issuer are attached;

1(e)(iv) Deleted

Chapter 1 — Article 2.1

Harmonisation of the definitions of home Member State between the Prospectus Directive and the current proposed
directive

1.

i)

i)

‘home Member State’ means

in the case of an issuer of debt securities
the denomination of which does not exceed
5 000 EUR or an issuer of shares:

i)

in the case of an issuer of debt securities
the denomination of which does not exceed
EUR 1 000 or an issuer of shares:

—

—

where the issuer is incorporated in the
Community, the Member State in which
it has its registered office;

where the issuer is incorporated in a
third country, the Member State in which
it is required to file the annual infor-
mation with the competent authority
in accordance with Article 10 of the
Prospectus Directive;

ii)

Unchanged

—

—

where the issuer is incorporated in the
Community, the Member State in which
it has its registered office;

where the issuer is incorporated in a
third country, the Member State in which
it is required to file the annual infor-
mation with the competent authority
in accordance with Article 10 of the
Prospectus Directive;

ii)

for any issuer not covered by i), the Member
State chosen by the issuer from among those
Member States which have admitted its securi-
ties to trading on a regulated market on
their territory, provided that those securities
continue to be admitted to trading on that
regulated market for three financial years, that
being the period of validity of the issuer’s
choice;

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Chapter II — Article 4

Extending the publication deadline for the annual financial report to four months

1.

The issuer shall disclose its annual financial report
to the public at the latest three months after the
end of each financial year and shall ensure that it
remains publicly available.

1.

The issuer shall disclose its annual financial report
to the public at the latest four months after the
end of each financial year and shall ensure that it
remains publicly available.

Chapter II — Article 5

Extending the publication deadline for the half-yearly annual report and clarifying the information to be updated in
the management report

1.

The issuer shall disclose to the public a half-yearly
financial report covering the first six months of the
financial year as soon as possible after the end of
the relevant period, but at the latest two months
thereafter. The issuer shall ensure that the half-
yearly report remains available to the public.

1.

The issuer shall disclose to the public a half-yearly
financial report covering the first six months of the
financial year as soon as possible after the end of
the relevant period, but at the latest three months
thereafter. The issuer shall ensure that the half-
yearly report remains available to the public.

2.

The half-yearly financial report shall comprise:

a)

b)

c)

the condensed set of financial statements;

an update of the last management report as
provided for in Article 4 (5);

a)

b)

Unchanged

an update of the financial data contained
in the last management report as provided
for in Article 4(5);

statements made by the persons responsible
within the issuer, whose names and functions
shall be clearly indicated, to the effect that
the information contained in the half-yearly
their
financial
knowledge, in accordance with the facts and
that the report makes no omission likely to
affect its import.

to the best of

report

is,

c)

Unchanged

Chapter II — Article 6

Limiting the mandatory quarterly publication to net turnover

1.

An issuer whose shares are admitted to trading on
a regulated market shall disclose to the public
quarterly financial information covering the first
and third quarter, respectively, of the financial year,
as soon as possible after the end of the relevant
three-month period, but at the latest two months
thereafter. The same issuer shall ensure that the
quarterly financial information remains available
to the public.

1.

An issuer whose shares are admitted to trading on
a regulated market shall disclose to the public at
least its net turnover for the first and third quarters
of the financial year as soon as possible after the
end of the relevant three-month period, but at
the latest two months thereafter.

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2.

Quarterly financial
least:

information shall contain at

a)

b)

c)

consolidated figures, presented in table form,
indicating, for the relevant three-month per-
iod, the net turnover, and the profit or loss
before or after deduction of tax; and

a)

Deleted

an explanatory statement relating to the
issuer’s activities and profits and losses during
the relevant three-month period; and

if the issuer so chooses, an indication of the
likely future development of the issuer and
its subsidiaries at least for the remaining
financial year,
including any significant
uncertainties and risks which may affect that
development.

b)

c)

An explanatory, statement relating to
activities;

If the issuer so chooses, an indication of
the likely future development of the issu-
er and its subsidiaries at least for the
remaining financial year.

3. Deleted

3. Where the quarterly financial information, or any
quarterly financial report, has been audited, the
audit report, and any qualifications thereto or
references to any matters by way of emphasis
to which the auditors draw attention without
qualifying their report, shall be reproduced in full.
The same shall apply in the case of an auditors’
review. If the quarterly financial information has
not been audited or reviewed by auditors, the
issuer shall make a statement to that effect.

4.

The Commission shall,
in accordance with the
procedure referred to in Article 23(2), adopt
implementing measures, in order to take account
of technical developments on financial markets
and to ensure the uniform application of para-
graphs 1, 2 and 3 of this Article.

The Commission shall, in particular:

4.

Unchanged

a)

b)

c)

specify the period of time throughout which
published quarterly financial information is
to remain available to the public, as well as
any other conditions to be complied with by
the issuer in that connection

a)

Deleted

clarify, if necessary, the terms ‘net turnover’
and ‘profit or loss before or after deduction
of tax’ in relation to specific types of issuers,
such as credit institutions;

b)

clarify, if necessary, the term ‘net turn-
over’
in relation to specific types of
issuers, such as credit institutions;

specify the information to be given in the
explanatory statement, as referred to in para-
graph 2(b), and in the indication of
the
issuer’s likely future development, as referred
to in paragraph 2(c);

c)

Unchanged

d)

clarify the nature of the auditors’ review,
referred to in paragraph 3.

d)

Deleted

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Chapter IV — Article 17

Clarifying the provisions for the dissemination of regulated information by the issuer

2.

A host Member State may not impose on issuers
any requirements regarding the media to be used
for the dissemination of regulated information.
However, a host Member State may require issuers:

2.

Unchanged

a)

b)

to publish regulated information on their
Internet sites, in which case the host Member
State shall keep the public informed as
regards the Internet sites of issuers; and

to alert any interested person, without delay
and free of charge, to any new disclosure or
any change to regulated information which
has already been published, such communi-
cation to be effected by electronic means or,
upon request, on paper.

a)

Unchanged

b)

to alert any visitor to these sites, without
delay, to any new disclosure or any change
to regulated information which has already
been published.

Chapter V — Article 20

Minimum harmonisation of checks by the competent authorities

1, 2, 3

1, 2 + 3 Unchanged

4.

Each competent authority shall have all the rights
necessary for the performance of its functions.

4.

It shall at least be empowered to:

Each competent authority shall have all the
rights necessary for the performance of its
functions. It shall ensure that the information
provided by issuers under this directive is
consistent and intelligible.

It shall at least be empowered to:

(a), (b), (c), (d), (e), (f), (g) and (h)

(a), (b), (c), (d), (e), (f), (g) and (h): unchanged

5 and 6

5 and 6: Unchanged

Brussels, 10 December 2003.

The President

of the European Economic and Social Committee

Roger BRIESCH