European Union Proposes Directive to Enhance Market Transparency

Washington, DC, April 8, 2003 - The European Union (EU) Commission has proposed a new directive to ensure the transparency of information about issuers whose securities are admitted to trading on a regulated market. Overall, the Transparency Directive aims to:

• better inform the public, by requiring investors to inform issuers of the acquisition or disposition of major holdings in companies;
• ensure transparency for investors, by requiring issuers to provide regular flows of information; and
• facilitate proxy voting by, among other things, requiring more information to be provided to investors in connection with general meetings.

The proposal now must be adopted under the co-decision procedure by the European Parliament and Council. The Commission is hopeful that the directive could be adopted and implemented by the member states no later than 2005.

Beneficial Securities Ownership Disclosure Requirements
The Commission proposes to lower the threshold (from 10 percent to 5 percent) at which investors must report beneficial ownership of securities, and to change the time period within which investors must notify issuers of a change in beneficial ownership from seven calendar days to five business days. Investors would be required to file with competent authorities of their home member state the information that they provide to issuers.

The Transparency Directive would permit member states to impose lower thresholds—as is currently the case in the United Kingdom (3 percent threshold for non-EU money managers) and Italy (2 percent)—and shorter disclosure deadlines or other rules stricter than those required under the proposed directive.

Under the directive, investors would be required to disclose, among other things, how much the shares represent in terms of voting rights and capital, the date on which the acquisition or disposal of shares was effected, and the identity of the security holder (including the natural person or legal entity entitled to exercise voting rights on behalf of the security holder).

To attract more third country investors to the European securities markets, the proposed directive would allow investors to notify issuers of their shareholdings in a “language customary in the sphere of international finance.”

Despite the Institute’s comments to the Commission on the previous consultations, the Transparency Directive does not tailor the rules for investment companies or asset managers. The Commission, however, has, as recommended by the Institute, proposed to adopt a standardized form to be used throughout the European Union for filing ownership information with issuers and the competent authorities of the member states. The Commission intends to adopt the standardized form as part of the implementing measures. The Commission also expects to adopt under the implementing measures the specific procedures under which investors may file information with the competent authority through electronic means.

Information Provided by Issuers
To facilitate voting (especially by investors resident abroad), the proposed directive updates the existing EU law regarding the information provided to investors for general meetings. The proposed directive would require issuers, among other things to provide information on the place, time, and agenda of shareholders meetings and to make available a proxy form to each person entitled to vote at a shareholders meeting together with the notice of the meeting. The proposed directive also would require the member state to allow issuers to use electronic means if such a decision has been made in a general meeting and meets certain conditions provided in the directive.

Issuers also would be required to provide certain standardized information on a periodic basis. Specifically, equity issuers would need to provide:

• an annual financial report within three months of the end of the financial year,
• a detailed semi-annual financial report, and
• quarterly financial information for the first and third quarters of a financial year.

The directive also introduces a semi-annual financial reporting requirement for issuers of only debt securities, which are not currently subject to any interim reporting requirements.

To reduce costs and burden for issuers whose securities are admitted to trading on regulated markets in more than one member state, certain issuers may choose to provide the periodic financial reports in a language customary in the international sphere of finance in addition to a language accepted by the issuer’s home member state. Host member states would not be permitted to require translation of the periodic or ongoing information.

In the proposed directive, the Commission also directs each member state to operate a system for disseminating information about a particular issuer at a single source. The proposal would require the competent authorities of the member states to draft guidelines to facilitate public access to information with the aim of establishing electronic networks through which investors in Europe could have real-time access.