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GC100: Listing Rules Guidelines Part I: Guidelines for establishing procedures, systems and controls to ensure compliance with the Listing Rules
Practical Law UK Practice Note 9-519-0929 (Approx. 30 pages)
GC100: Listing Rules Guidelines Part I: Guidelines for establishing procedures, systems and controls to ensure compliance with the Listing Rules
by GC100 and Practical Law Corporate with assistance from William Underhill and Murray Cox, Slaughter and May
| Law stated as at 01 Oct 2015 • United Kingdom |
Note that these guidelines have been superseded by Practice note, GC100: guidelines for establishing procedures, systems and controls to ensure compliance with Listing Principle 1.
These guidelines have been seen by the FCA which has agreed to add the following wording: "The FCA has not reviewed these guidelines but believes that the provision of material of this nature by industry bodies is a helpful initiative."
Scope of this note
These guidelines have been drawn up by the GC100 Listing Rules Working Group to assist members of GC100 to establish procedures, systems and controls for the purposes of complying with the requirements of the Listing Rules.
For GC100's guidelines on:
- Dealings under the Model Code and disclosure of dealings, see Practice note, GC100: Listing Rules Guidelines Part III: Guidelines on obligations to notify dealings and Model Code compliance.
GC100 is the association of general counsel and company secretaries working in FTSE 100 Companies. These guidelines, which do not necessarily reflect the views of all individual members of the GC100 or their employing companies, have been produced for guidance only. Nothing in these guidelines or the accompanying appendices represents advice by the GC100 or any of its members, Practical Law, Thomson Reuters Professional (UK) Limited or any of the participants in the Listing Rules Working Group to any person and none of the GC100, its members, Practical Law, Thomson Reuters Professional (UK) Limited and the participants in the Listing Rules Working Group accepts any responsibility or liability to any person for or in respect of the guidelines. It is the responsibility of individual companies to ensure that they understand, and have compliance procedures in place that meet the requirements of, the Listing Rules and the Disclosure Rules and Transparency Rules (DTRs) and to take specific external advice (legal or otherwise) as they deem appropriate.
The guidelines are limited to procedures, systems and controls. Detailed guidance on the application of the Listing Rules and DTRs is outside the scope of these guidelines.
Note that, for the purposes of the Listing, Prospectus, Disclosure and Transparency Rules, the FSA was replaced by the FCA on 1 April 2013. For convenience, we refer to the FCA throughout these guidelines, although the FSA was the regulatory body responsible for decisions made and publications issued before 1 April 2013.
Section 1: Overview
1.1 Listing Principle 1
Listing Principle 1 requires a listed company to have in place procedures, systems and controls to ensure that it complies with its obligations under the Listing Rules and the DTRs (Compliance Procedures).
LR 7.2.2G provides guidance on Listing Principle 1, stating that listed companies should place particular emphasis on ensuring that they have adequate procedures, systems and controls in relation to:
- Identifying whether any obligations arise under LR 10 (Significant transactions) and LR 11 (Related party transactions).
- The timely and accurate disclosure of information to the market.
Timely and accurate disclosure of information to the market is a key obligation of listed companies and companies with a premium listing should have adequate systems and controls to ensure that they can properly identify information which requires disclosure under the Listing Rules or the DTRs in a timely manner, that such information is properly considered by the directors and that such consideration encompasses whether the information should be disclosed (LR 7.2.3G).
The FCA is prepared to take enforcement action on the basis of the Listing Principles alone. In March 2013, it imposed a financial penalty of £14 million on Prudential plc for failing to deal with it in an open and co-operative manner in breach of Listing Principle 6 (now Listing Principle 2). In January 2015, the FCA imposed a financial penalty on Reckitt Benckiser Group plc for failures to ensure compliance with the Model Code and to make required DTR notifications, and for breaches of Listing Principles 1 and 2 (now Listing Principle 1 and Premium Listing Principle 1).
For examples of final notices issued by the FCA for breaches of the Listing Principles, Listing Rules and DTRs, see Practice note, FCA and FSA final notices regarding breaches of the DTR and LR.
1.2 Compliance Procedures
The Compliance Procedures are to assist companies to:
- Identify events or circumstances that give rise to an obligation under the Listing Rules and the DTRs so that appropriate action can be taken.
- Identify the requirements of the Listing Rules and the DTRs that will be relevant to actions that are being planned and the steps required to comply with them.
- Identify the obligations that arise regularly and routinely and establish effective procedures for complying with those obligations.
- Allocate responsibility for compliance to appropriate individuals who are aware of that responsibility and receive appropriate training.
- Provide a record that can be used to defend actions should the circumstances be investigated.
- Establish a framework for periodic review of the effectiveness of the procedures, including independent testing (audit).
1.3 Financial reporting procedures
A company's financial reporting procedures are an important part of the procedures, systems and controls required by Listing Principle 1.
LR 8.4.2R(4) makes it clear that the directors of a new applicant must have established procedures which provide a reasonable basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of the applicant and its group.
The Institute of Chartered Accountants in England and Wales (ICAEW) has published guidance on the financial position and prospects procedures (TECH 01/13CFF). (This guidance replaces the guidance in FRAG 10/95 which the ICAEW issued in respect of paragraph 2.15 of the old Listing Rules.) The guidance in TECH 01/13 includes a definition of "financial position and prospects procedures" and explains how directors can demonstrate that they have established such procedures.
The importance of financial reporting procedures for both the board and executive management was highlighted in March 2013 when the FCA imposed a financial penalty of £2.4 million on Lamprell plc for systems and controls failings in breach of Listing Principle 2 (now Listing Principle 1). The failings meant that the company did not recognise its deteriorating financial position as soon as it should have done and, consequently, did not inform the market of its deteriorating position in a timely way.
Financial reporting procedures form part of a company's internal control system (see section 3 of the FRC's Guidance on Risk Management, Internal Control and Related Financial and Business Reporting) and are therefore subject to regular board review. Accordingly, these guidelines do not deal with financial reporting procedures.
1.4 Implementation
We expect that many companies will conclude that their existing systems and procedures for reporting information and managing risk will form the basis of their Compliance Procedures.
Establishing formally a set of Compliance Procedures will involve being satisfied that:
- The systems and procedures are designed to produce the right information flows.
- The information is directed to those responsible for taking informed decisions about inside information.
- These procedures and systems are clearly understood by those involved and their efficiency can be checked. Companies may want to document the procedures (although this is not required by the FCA).
- A proper record is kept of relevant decisions made and actions taken.
For a more detailed checklist, see Appendix 1: Compliance Procedures checklist and project plan.
Section 2: Continuous disclosure obligations
This section deals with the obligation of issuers under the DTRs to notify a Regulatory Information Service (RIS) as soon as possible of any inside information that directly concerns the issuer (DTR 2.1 to 2.7). It may be helpful to establish accountabilities for these obligations and a checklist and suggested control format is set out in Appendix 2: Notification and disclosure obligations under the Listing Rules and DTRs (this checklist and control format also addresses notification and disclosure issues relating to insider lists and disclosure obligations generally under the Listing Rules).
For a definition of "inside information", see section 2.3 Identification of inside information.
2.1 Disclosure of inside information
Disclosure requirement
Under DTR 2.2.1R an issuer must notify an RIS as soon as possible of any inside information which directly concerns the issuer unless DTR 2.5.1R applies (that is, disclosure can be legitimately delayed).
Issuers should note that:
- Although the rule requires disclosure as soon as possible, FCA guidance allows "a short delay" if necessary to clarify the situation in relation to an "unexpected and significant event".
- Holding announcements should be used where there is a danger of a leak (DTR 2.2.9G(2)).
- If a holding announcement cannot be made, it may be appropriate to suspend trading until it can be made (DTR 2.2.9G(3)).
- They are encouraged to consult the FCA if they are in any doubt (DTR 2.2.9G(4)).
Delaying disclosure
The announcement of inside information may be delayed if the delay is required to avoid prejudice to the issuer's legitimate interests. Three tests must be satisfied:
- The omission must not be likely to mislead the public.
- Disclosure while announcement is delayed must be subject to confidentiality obligations.
- The issuer must be able to ensure that confidentiality is maintained.
(DTR 2.5.1R.)
The FCA considers that, other than in relation to impending developments or matters in the course of negotiation that could be jeopardised by premature disclosure, there are unlikely to be other circumstances where delay would be justified (DTR 2.5.5G).
Note that, the Market Abuse Regulation (EU Regulation 596/2014) (MAR), which comes into force on 3 July 2016, will repeal and replace the existing Market Abuse Directive. MAR will make some changes to the disclosure regime, in particular making it compulsory for an issuer to inform its regulator after the event when it has delayed disclosing inside information and to provide a written explanation of why it believes that the delay was permissible. The FCA has not yet indicated if it will require issuers to provide these notifications as a matter of course or only on request.
Selective disclosure
Prior to announcement, disclosure may be made on a confidential basis to those who require the information to perform their functions. These include:
- Advisers.
- Negotiating counterparties.
- Employee representatives.
- Government departments.
- Major shareholders.
- Lenders.
- Rating agencies.
This list is not exhaustive and disclosure may be made to others if there is a legitimate purpose for doing so.
If any other selective disclosure of inside information is made, "complete and effective public disclosure" must be made via an RIS (DTR 2.5.6R).
Rumours
If there are rumours regarding an issuer, the issuer needs to assess whether it has a disclosure obligation.
If true, rumours may show that there has been a failure to ensure confidentiality and therefore the issuer is unlikely to be able to delay disclosure of the information. In this case an announcement would be required as soon as possible.
Knowledge that a rumour is false is unlikely to be inside information, and if it is, the issuer is likely to be entitled to delay announcement (DTR 2.7).
Although there is normally no obligation to respond to rumours which are without substance, the inaccuracy of some details in a story or rumour will not, of itself, justify non-disclosure of inside information.
Market Watch 30 (MW30) outlines the FCA's review of industry best practices for handling rumours. Areas which are covered by MW30 include:
- The adoption of formal guidelines and policies for handling rumours.
- The provision of adequate training.
- Adequate monitoring of communication and trading.
2.2 Objectives of the Compliance Procedures as regards inside information
The Compliance Procedures must:
- Lead to the identification of information that may be inside information, as it arises (Identification) (see section 2.3 Identification of inside information).
- Ensure that potentially inside information that has been identified is reported, and that appropriate people assess whether the information is inside information and whether an announcement is required (Control) (see section 2.4 Control).
- Ensure that announcements that are made meet the standards of accuracy and completeness laid down by the rules (Verification) (see section 2.5 Verification).
All of the above must happen in a short timeframe, so that the obligation to announce "as soon as possible" can be complied with. Note the guidance in DTR 2.2.8G that the directors of the issuer should carefully and continuously monitor whether changes in the circumstances of the issuer are such that an announcement obligation has arisen under DTR 2. The Compliance Procedures should, however, control the flow of information so that the decision-making process does not become bogged down in unnecessary details about matters that are immaterial.
2.3 Identification of inside information
Definition of inside information
"Inside information" is defined in section 118C of the Financial Services and Markets Act 2000 (inserted by the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005). To be inside information, the information:
- Must be precise.
- Must not be generally available.
- Must relate, directly or indirectly, to one or more issuers of qualifying investments or to one or more of the qualifying investments.
- Would, if generally available, be likely to have a significant effect on the price of the qualifying investments.
To be "precise", the information must satisfy two tests. It must:
- Relate to existing circumstances or circumstances that may reasonably be expected to come into existence or an event that has occurred or may reasonably be expected to occur.
- Be specific enough to enable a conclusion to be drawn as to the possible effect of those circumstances or that event on the price of the issuer's securities or related investments.
In terms of price sensitivity, traditionally the "reasonable investor test" required an assessment of whether the information in question would be likely to both:
- Be used by "a reasonable investor" as part of the basis of his investment decision.
- Have a significant effect on the price of the issuer's securities.
In its decision in the case of Ian Hannam v FCA, the Upper Tribunal considered the reasonable investor test and its relationship with the requirement for price sensitivity. As a result, the reasonable investor test must be applied taking into account the likely effect of the information on the price of listed securities. For this purpose information is "likely" to have a price effect if there is a real (and not fanciful) prospect of having that effect. It must also be possible to predict the direction of the price movement.
The significance of information will vary widely from issuer to issuer and depend on a variety of factors. In DTR 2.2.6G, the FCA suggests that the following are likely to be considered relevant to a reasonable investor's decision:
- Assets and liabilities of the issuer.
- Performance or expectation of the performance of the issuer's business.
- Financial condition of the issuer.
- Course of the issuer's business.
- Major new developments in the issuer's business.
- Information previously disclosed to the market.
Mitigating factors do not justify non-disclosure, that is, positive news cannot be used to justify the non-disclosure of negative news. However, the limits of this principle are not clear. Where the significance of some negative information depends on some other positive information it may be legitimate to consider the effect of both in assessing the price sensitivity of the former.
The directors of the issuer should carefully and continuously monitor whether changes in the circumstances of the issuer are such that an announcement obligation has arisen under DTR 2.
Information likely to be inside information includes:
- Dividend announcements.
- Appointments to, and departures from, the board of directors.
- Share dealings by directors.
- Acquisitions and disposals that are required to be announced under the Listing Rules.
- Profit warnings.
- Annual/interim/quarterly results.
- Major business developments.
- Changes in the company’s financial condition/business performance.
- Changes in the company's expectations of performance.
- Changes in information previously disclosed to the market.
- Significant potential litigation.
Different categories of inside information
Inside information is likely to fall into one of the following categories:
- Trading information. Information about performance of the business in the past or at a moment in time (including current trading conditions) and information about changes in expectations of the company regarding its future performance. For more details on trading information, see Trading information.
- Projects. Information about projects, in which we include transactions (including acquisitions and disposals, joint ventures, financings and commercial agreements) and strategic developments (commencing or terminating a business activity) at all stages from inception to completion. For more details on projects, see Projects.
- Events. Information about a one-off event (including changes in circumstances that affect the company) that has occurred.Examples of internal events include:
- loss of a regulatory licence;
- a major claim against the company; and
- a major systems failure, gain or loss of a major customer.
Events may also be external, such as:- insolvency of a major customer or supplier;
- other unplanned interruptions in supply (such as a fire at a supplier's plant);
- natural disasters; and
- information relating to a one-off event that has not yet occurred but where it is foreseeable that the event may occur.
For more details on events, see Events.
The Compliance Procedures should recognise these different types of information and set out how in each case the Identification objective will be met.
Allocation of responsibility for internal reporting of information that may be inside information
The Compliance Procedures should identify the individuals responsible at an operational level for identifying information that may be inside information and reporting that information (see section 2.4 Control).
Judgements will have to be made at an operational level, which will involve an assessment of whether a project, event or change in trading at business unit level is sufficiently material to the business unit concerned. It is likely to be unrealistic to expect operational management to make these judgements using the tests for "inside information" and instead the emphasis is likely to be on defining the materiality test to be applied to the business unit concerned.
Some companies may find it helpful to provide guidance on what kind of information may constitute inside information for the company concerned but it is unlikely that companies will be able to provide definitive advice as to what will or will not constitute inside information. The Compliance Procedures should emphasise the importance of communicating relevant information to the individuals who will have to decide what action (if any) is appropriate.
Financial and non-financial KPIs for internal reporting purposes
In order to avoid complex judgements being made at an operational level, it may be helpful to set thresholds for relevant financial and non-financial key performance indicators (KPIs), with a requirement that if a threshold is exceeded the information should be reported and a decision taken about whether the information is inside information. By setting thresholds conservatively, at a level that is lower than that which is judged to be likely to constitute inside information, companies will encourage reporting of information that may be inside information and therefore warrants careful consideration. However, there are limits to what can be achieved with objective thresholds of this kind and it should be emphasised that failure to achieve, or a significant variance in, a single KPI will not necessarily amount to inside information. It will always be necessary to exercise judgement in each particular case, taking into account all relevant factors, and the Compliance Procedures should be clear on where that responsibility resides.
KPIs to be used will principally be those that the board of the company considers important for its management of the business. Different KPIs will be relevant for different industries/sectors. In addition to the KPIs that are important for the management of the company, it will be necessary to consider those that will be important to investors. For example, effect on earnings per share (EPS) may not be a KPI used for management purposes but may be a major factor in valuation of the company's shares. In this case it would be appropriate to include a KPI referenced to EPS for the purposes of setting thresholds for reporting information.
For financial years ending on or after 30 September 2013, companies must prepare a strategic report (which has replaced the business review). To the extent necessary for an understanding of the development, performance or position of the company's business, the strategic report must include analysis using financial KPIs and, where appropriate, other KPIs (including information about environmental and employee matters). The KPIs identified for this purpose will usually also be used for internal reporting purposes (although others may also be appropriate). There are no statutory requirements on how KPIs should be presented and no requirements to produce explanatory information with KPIs but the FRC's Guidance on the Strategic Report provides some useful guidance on KPIs.
The process of defining the KPIs that will be used in the business review will inform the choice of KPIs for the reporting of information for the purpose of the Compliance Procedures.
When identifying KPIs and setting thresholds it is likely to be useful to seek advice from the company's brokers on the KPIs regarded as important to investors and the level of threshold that would be appropriate. It will also be helpful to review past results announcements to identify the performance parameters used by the company in its communications with investors.
Trading information
The trading experience of a company may be inside information if it differs materially from the company's internal forecasts or it results in a change in the company's internal forecasts.
The Compliance Procedures should ensure that:
- The regular internal management information reporting process involves assessment by appropriate individuals of whether the information reported represents inside information.
- Responsibility for that assessment is allocated clearly.
For example, the Compliance Procedures may specify that a specific forum (for example, a Disclosure Committee) is responsible for reviewing the regular management reports when received and assessing whether they disclose any divergence from expectation that would require announcement.
While generally it will be sufficient to rely on the normal reporting timetable, it may be appropriate to require individuals with responsibility for material reporting units to make an accelerated report of any potential issue ahead of the internal reporting deadline, once the information is known. For this purpose, a reporting unit is material if information relating to that unit on its own could amount to inside information.
The Compliance Procedures should also ensure that a relevant individual, who becomes aware between regular reports of a change in trading that may constitute inside information, is required to report that change. For example, a company with three divisions may identify each division as a material business unit. The Compliance Procedures may require:
- The CFO of each division to be responsible for alerting the group CFO of:
- material trading changes identified during a reporting period; and/or
- "flash" numbers indicating a material divergence from expectations as soon as they are identified, not waiting for the regular reporting point.
- The group CFO to consider in an appropriate forum whether the information amounts to inside information for the group.
When considering whether information concerning trading arising in one business unit is inside information, a company will need to have regard to the total group position.
Projects
When work commences on a new project, it may be helpful to make an assessment of whether information about the project is or may amount to, when it develops, inside information. Although at inception a project may be too uncertain to amount to inside information, making this judgement early may be a convenient way of ensuring that the necessary precautions are taken in respect of the project. It may not be practical to require individual judgements on a case by case basis and to ease that burden it may be possible to identify categories of transaction that are to be treated or not treated as giving rise to inside information.
Even if this approach is taken, it will still be necessary to identify in relation to each project the time at which information relating to that project becomes inside information (see below). For example, the Compliance Procedures might specify that the following are assumed to be relevant transactions (and will therefore be reported and assessed in accordance with the Control procedures (see section 2.4 Control)):
- Acquisitions and disposals of companies or businesses and joint ventures (or such acquisitions and disposals and joint ventures above a size threshold).
- Financings in which the amount raised exceeds £[AMOUNT] million.
- Commercial agreements where the aggregate annual revenue/expenditure/capital required exceeds £[AMOUNT] million.
It is likely that the strategy and planning processes and the existing approvals process will provide a framework for the identification of relevant projects. However, companies should bear in mind that approvals limits may well be set far lower than the relevant threshold for inside information.
Companies may decide to maintain a central list of all current projects identified as potentially involving inside information (although the obligation to include names on an insider list does not arise until information about the project actually amounts to inside information). That list would provide an opportunity to cross-check that each of the actions that flow from the identification of a relevant project have been dealt with. These are:
- Classification of transactions.
- The establishment of insider lists (internal and external).
- Preparation of leak announcements (see Confidentiality and leak/holding announcements).
- Determination of whether a prohibited period exists for the purposes of the Model Code and, if so, triggering a process to deny clearance to deal to relevant employees.
The Compliance Procedures should provide for projects to be removed from the list when they have been completed and announced or abandoned or if they cease to be material.
As mentioned above, projects may be identified on the basis that they may in future, if brought to fruition, generate inside information. The Compliance Procedures may provide some guidance on when, in the development of a project, information about the project becomes inside information. In earlier versions of these guidelines, it was suggested that this would often be at the time that the project is more likely than not to come to fruition. Since the Hannam decision, however, it may no longer be prudent to adopt this approach but instead to treat information about a project as inside information once launch of the project becomes a realistic prospect. In any event, it is clear that, individual stages of a project could constitute inside information. For example, a takeover approach may constitute inside information even if the takeover itself is not yet likely to occur. Although certain consequences may flow from the initial identification of the project (for example, creating insider lists) others (for example, deciding whether an announcement is required or may be delayed and whether restrictions on dealings are necessary) are only triggered when actual inside information is generated.
Events
The Compliance Procedures should identify individuals who would be likely to become aware of an event giving rise to inside information. For example:
- Identify each business unit that is sufficiently material to a company that material events affecting that business could amount to inside information for the company.
- Make the CEO and CFO of each of these business units responsible for reporting events affecting that business unit.
A report should be required if it is:
- Known with certainty that an event has occurred;
- Believed to be likely that an event may occur; or
- Believed to be likely that an event has occurred.
If there is any doubt about the requirement, a report should be made. For these purposes, "event" means an occurrence where information about that occurrence may have a material impact on that business unit and so could amount to inside information.
The Compliance Procedures should recognise the difficulties that arise where there is uncertainty either:
- Whether something has in fact happened; or
- What effect that event may have.
The Compliance Procedures will need to strike a balance between (i) the need for urgent notification to those responsible for deciding whether inside information exists and whether an announcement is required and (ii) the need to provide adequate information for a properly informed decision to be made (and, if necessary, an announcement to be drafted).
2.4 Control
The Compliance Procedures must ensure that potentially inside information that has been identified is reported and the appropriate people assess whether the information is inside information and whether an announcement is required.
Reporting lines
Reporting lines should be clear and should take into account the requirement to announce inside information as soon as possible after it has been identified and therefore reporting lines should be as short as can reasonably be achieved.
Decision making
- Allocation of responsibility. The Compliance Procedures should identify the people in the company who are responsible for:
- deciding whether information is inside information;
- deciding whether the company is entitled to delay announcement of the inside information;
- approving announcements if required;
- deciding to take other action, if appropriate (for example, to seek a suspension from listing pending clarification of uncertainties).
It is likely that the decision-making process will involve input from the financial reporting function, group legal, investor relations and internal and external communications.The Compliance Procedures should address the extent of the involvement of directors in these decisions. For example, the Compliance Procedures may identify three categories of decision:- those that do not require a director to be involved;
- those that require one or more executive directors; and
- those that should, where possible (see below), involve the full board.
Companies may find it convenient to identify a list of individuals, and perhaps in addition (or instead of) establish a Disclosure Committee, to have responsibility for decisions regarding inside information and the form and timing of an announcement if one is required.Companies may find it helpful to identify areas/sources from which inside information may arise (perhaps categorised by reference to trading information, events or projects) and allocate responsibility for monitoring and reviewing these areas and sources.Appendix 4: Responsibility for reviewing information sets out a possible way of documenting this process as well as suggesting a possible approach to formalising the roles and responsibilities of those identified as being responsible for: (a) considering whether a piece of information received from the reviewers is inside information; and (b) determining whether an immediate announcement is necessary and whether there can be a delay. - Advice. The Compliance Procedures should ensure that the individuals making decisions about whether information is inside information and, if so, how to handle it are provided with adequate information and advice. In many cases it will be appropriate to obtain advice from external advisers. The FCA considers an issuer's failure to take timely advice from legal advisers and corporate brokers in relation to disclosure obligations to be an aggravating factor when assessing the level of financial penalty to impose on an issuer for breach of the obligation to disclose inside information. Where advice is given by an external adviser, it should not be ignored. For guidance on determining whether information is "inside information", see section 2.3 Identification of inside information.
- Disclosure Committee. Companies that already have a Disclosure Committee as part of Sarbanes-Oxley compliance procedures may find it convenient to give that committee primary responsibility for these decisions.
- Awareness of investor sensitivities. The Compliance Procedures should allocate responsibility for keeping market expectations under regular review so that the decisions whether information is inside information can be made on a properly informed basis. Any assessment of market expectations is likely to start with a consensus of expectations taken from published research but it should be recognised that a simple mean of all analysts may not be appropriate.For example, it may be appropriate to identify key analysts whose views are considered authoritative. In addition, care should be exercised to ensure that estimates that are out of date (for example, have not been updated following recent announcements) are disregarded or discounted.
- Forward-looking statement log. Companies should consider whether the Compliance Procedures should require that a log is kept of material forward-looking statements published by the company. Such a log can be helpful when assessing how actual experience compares to statements made and whether, as expectations change over time, the divergence between current expectation and past prediction/aspiration has become sufficiently material to amount to inside information.
- Board involvement. The Compliance Procedures will need to recognise that in a case where the board ought if possible to be involved, there may not be time to convene a board meeting. The board should agree on the procedure to be followed in case of an emergency as the inability to convene a full board meeting is unlikely to be a legitimate reason to delay disclosure. This may involve establishing a committee with delegated authority to make decisions when it is not practical to convene a meeting of the board.Boards may wish to consider including in each regular board meeting a review of the company’s compliance with its announcement obligations. This may involve a report from the Disclosure Committee and minuting the decisions taken in respect of any matters brought to the board’s attention. In particular, it may be appropriate for the board to review any decisions that have been taken to delay announcements of inside information.
Confidentiality and leak/holding announcements
If inside information is identified and a decision taken that no announcement is required immediately, the company comes under obligations to manage that information to ensure its confidentiality (DTR 2.6.1R). The steps to be taken will include:
- The establishment of an insider list (if not already in place).
- The preparation of a leak announcement.
- Notification to the individuals responsible for Model Code compliance.
An issuer must make arrangements for an immediate announcement if there is a leak (DTR 2.6.2R). If, however, an issuer is relying on DTR 2.5.1R to delay the disclosure of inside information, it should make a holding announcement (DTR 2.6.3G). Such holding announcement should:
- Detail as much of the subject matter as possible.
- Set out the reasons why a fuller announcement cannot be made.
- Include an undertaking to announce further details as soon as possible.
Holding announcements must be meaningful and reflect the extent to which the leak is truthful. The FCA is increasingly monitoring holding statements and may challenge those which do not reflect the leak in sufficient detail.
The Compliance Procedures should also set out (or refer to) the steps to be taken to ensure confidentiality of information is maintained.
Communications policy
Companies may wish to consider adopting a communications policy. For recommendations on matters that might be covered by the communications policy, see Appendix 3: Communications policy.
Publication
The Compliance Procedures should allocate responsibility for ensuring that publication of inside information is made in accordance with the DTRs:
- By announcement via an RIS (DTR 2.2.1R and see also DTR 6.3).
- By close of the business day following announcement, by being made available on the company's website (DTR 2.3.2R).
- If required when an RIS is closed, by release to two national newspapers and two newswire services. In addition, the information must be distributed to an RIS for release as soon as it is open (DTR 1.3.6R).
Record keeping
We recommend that appropriate records are kept. (It appears from the Reckitt Benckiser case that, in the absence of written records, the FCA will assume that proper procedures were not followed.) A company's written records may record information that has been reported and considered, of the decision taken and, where it is decided that the information is not inside information or that no disclosure should be made, it may be helpful to record the rationale for that decision. Where outside advice is taken, that fact and the substance of the advice received should be recorded.
Training
Training of those involved in operating the Compliance Procedures will be important. The amount and content of training will depend on the role of the individual concerned. Those involved in the primary decision-making function will require a detailed knowledge of the DTRs and to be kept current on any new developments, including formal and informal guidance issued by the FCA. It is not sufficient to rely on the experience of the individuals involved.
Audit
The Compliance Procedures should provide for a regular review of their effectiveness. It may be appropriate for this to be carried out by the internal audit function (although if this is proposed it would not be appropriate for the internal auditor to be part of the decision-making process). The board should receive a report summarising the results of the review process periodically.
2.5 Verification
Why is verification needed?
The Compliance Procedures should set out the steps to be taken to ensure that any announcement that is made meets the standards imposed by the DTRs, namely that any information that the issuer notifies to an RIS is not misleading, false or deceptive and does not omit anything likely to affect the import of the information (DTR 1.3.4R).
Verification process
The Compliance Procedures should emphasise the importance of verification of all announcements to be released to an RIS. They should provide clear allocation of responsibility for the verification process and establish a sign off process that will ensure that those responsible for final approval of announcements are provided with confirmation that verification has been completed.
Timing
Once inside information has been identified, the nature of the obligation to announce inside information "as soon as possible" allows little time for the verification process. On the other hand, sufficient verification must be undertaken to ensure compliance with DTR 1.3.4R.
Companies may well find that it is not possible to decide whether information in some circumstances is or is not inside information without verification. Where there are material uncertainties, it may be permissible to take time to clarify the position, to avoid an announcement that confuses rather than informs the market. Note the guidance in DTR 2.2.9G which provides that if an issuer is faced with an unexpected and significant event, a short delay may be acceptable if it is necessary to clarify the situation.
If, however, the company believes that there is a danger of inside information leaking before the facts and their impact can be confirmed, a holding announcement should be issued (DTR 2.2.9G). It will usually be prudent to prepare a draft holding announcement as soon as a potentially announceable situation has been identified.
Section 3: Other obligations
This section deals with the obligations of companies under the Listing Rules and the DTRs not covered elsewhere. Many of these do not require procedures, systems and controls to ensure compliance but will be relevant in relation to specific transactions in respect of which it is likely that external advisers will be engaged who may be expected to identify the requirements of the rules that need to be complied with.
3.1 Directors' responsibilities
Premium Listing Principle 1 requires issuers with a listing of equity securities on the Premium Segment of the Official List to take reasonable steps to enable their directors to understand their responsibilities and obligations as directors.
Induction programme
Ensure that all directors receive an up-to-date induction programme on joining the board and a memorandum on their duties as a director and the DTRs and ask them to confirm in writing that they have read and understood the memorandum.
An issuer must take the necessary measures to ensure that its employees with access to inside information acknowledge the legal and regulatory duties entailed (including dealing restrictions in relation to the issuer's financial instruments) and are aware of the sanctions attaching to the misuse or improper circulation of such information (DTR 2.8.9R). It is not sufficient for a company to rely on the experience and knowledge of its board members, or indeed of any of its PDMRs or employees.
For practical guidance on compliance with the requirements for notification of PDMR dealings, see section 4 of Practice note, GC100: Listing Rules Guidelines Part III.
Ongoing training
Ensure that all directors attend a regular programme of ongoing training to update and refresh their skills and knowledge. The overall programme for the directors should include training to ensure that the directors are not just aware but also understand the requirements of the Listing Rules, the Model Code, the DTRs and company law. Include in the training programme practical examples of implications of certain rules to assist understanding.
It is likely to be necessary to repeat this training periodically and as rules change or experience of their interpretation by the FCA develops.
Records
Ensure that clear written records are kept of all training given to directors and of any decisions taken or relevant changes implemented by directors following such training (for example, changes made to procedures in the issuer to reflect amendments to the Listing Rules or DTRs).
3.2 Delegation
3.3 Continuing obligations for which specific procedures may be helpful
Share buybacks (LR 9.2.7R)
The Compliance Procedures should require any person authorised to give instructions for dealings in the company's securities to go through the same process to obtain clearance to deal as would apply to a director or PDMR.
Shares in public hands (LR 9.2.15R)
A company that is close to failing to comply with LR 6.1.19R (sufficient shares in public hands) should institute procedures to ensure that the position is monitored and appropriate action is taken to rectify the position.
Notifications (LR 9.6)
A company should establish procedures to ensure compliance with the notification requirements in LR 9.6. In general, this will be satisfied by ensuring a clear allocation of responsibility and that the person with responsibility is informed of the event giving rise to the notification obligation.
3.4 Model Code
Following the Reckitt Benckiser decision, issuers should consider adopting procedures in relation to Model Code compliance that go beyond bringing that policy to the attention of PDMRs. Procedures may include:
- Annual confirmation from each PDMR that they are aware of and understand the Model Code (and any other share dealing policy).
- Written notification to each PDMR prior to each close period reminding them that they will be unable to deal during that period.
- Providing PDMRs with regular training on these requirements.
- Considering requiring all PDMRs (and their connected persons) to deal through a nominated broker, with whom arrangements are made to check that clearance to deal has been obtained.
- Making arrangements with the company's share dealing policy administrator to check that clearance has been received before undertaking any dealing for a PDMR.
- Requiring all requests and clearances to be in writing and ensure that the clearance specifies the deadline for dealing to take place. Renewals of the clearance if dealing is delayed should also be in writing. Keep a record of all requests and responses.
- Keeping the operation of the procedures under review and subject to regular audits.
For further practical guidance on Model Code compliance, see section 2 of Practice note, GC100: Listing Rule Guidelines Part III.
3.5 Transactions
The Compliance Procedures should allocate responsibility for assessing transactions against the class tests in LR 10 and for related party implications under LR 11, ideally at an early stage in the planning process.
3.6 Reporting changes in issued share capital
Procedures should be put in place to ensure that the company complies with its monthly reporting obligation to an RIS of any changes in the total number of voting rights and capital in respect of each class of issued shares (DTR 5.6.1R). Note that if the increase or decrease is material, an announcement must be made no later than the end of the business day following the day on which the increase or decrease occurs (DTR 5.6.1AR). (It is for the issuer to assess whether the effect on the total voting rights is immaterial but in the FCA's view, an increase or decrease of 1% or more is likely to be material (DTR 5.6.1BG)).
Appendix 1: Compliance Procedures checklist and project plan
Checklist
- Identify existing processes. This will involve understanding the group's reporting procedures and reviewing the way the Identification, Control and Verification objectives are met.
- Consider where in the organisation information that may be inside information is likely to arise. For example:
- regular/daily business analyst contacts between head office and business units;
- group CEO and business unit CEO 1:1;
- monthly flash results;
- monthly finance pack;
- product development reports;
- compliance/risk reports;
- litigation returns;
- internal audit reports;
- business unit regular dialogue/planning/review process with GHO;
- strategy meetings;
- project lists; and
- disaster recovery process.
- In each case identify:
- who is responsible for monitoring and gathering the information;
- who it is sent to;
- how it is escalated;
- what materiality test is applied and who applies it;
- who decides whether information is inside information; and
- who decides whether there is an obligation to announce.
- Confirm that the financial reporting procedures are satisfactory (see TECH 01/13 CFF).
- It may be helpful to review recent ad hoc announcements: this may expose the way existing procedures work. It may also contribute to defining relevant KPIs or other tests for the reporting thresholds (see below).
- Identify the business units that are sufficiently material that events affecting them may constitute inside information.
- Determine whether existing structures should have a role in the Compliance Procedures (for example, the Disclosure Committee).
- Consider setting KPIs for the reporting of information from within the company. This is likely to involve a review of recent announcements (which will show what has in practice been considered material for announcement) and discussion with brokers.
- Consider whether a communications policy would be helpful. If a policy exists check it is up to date with current guidance. For more information on a communications policy, see Appendix 3: Communications policy.
- Assess the training needs of the people responsible for the implementation of the Compliance Procedures and propose a programme to rectify any deficiencies.
- Establish a periodic review process.
Project Plan
Requirement | Action |
1. Establish overarching compliance procedures, systems and controls. | |
2. Establish contacts, at the appropriate level, in all business units and head office who will take ownership of the procedures. | |
3. Produce guidance on what may constitute "inside information" (see 14 and 15 below). | |
4. Identify individuals/forums that assess if information is "inside information" (cross reference with 3 above). | |
5. Define process that individuals will go through to decide if an announcement is required. | |
6. Establish sign-off process for all announcements arising from 5 above to cover accuracy, completeness and timeliness. | |
7. Establish documentation standards to capture all decisions and communications. | |
8. Produce guidance on what projects may be relevant (including appropriate thresholds). | |
9. Establish project insiders procedures (Chinese walls). | |
10. Produce guidance on what events may be relevant including KPIs defined under 14 below. | |
11. Identify individuals that are likely to become aware of an "event". | |
12. Establish sign-off and documentation procedures to deal with any "events", as defined in 10 above. | |
13. Produce guidance on what trading information may be relevant, including KPIs defined under 14 below. | |
14. Define a set of financial and non-financial KPIs. | |
15. Establish conservative thresholds for relevant financial and non-financial KPIs. | |
16. Establish process for periodically reviewing the KPIs and thresholds set out in 14 and 15 above. | |
17. Record reporting process to be followed in the event that potentially inside information is identified. | |
18. Establish training/awareness procedures to cover these requirements. | |
19. Establish a communications process to raise awareness and promote ownership. | |
20. Establish policy and procedures relating to retention of all announcements. | |
21. Establish procedures for documenting and retaining all advice given by outside advisers. | |
22. Audit the system. |
Appendix 2: Notification and disclosure obligations under the Listing Rules and DTRs
The tables below summarise the notification and disclosure obligations under the Listing Rules and the DTRs for issuers whose shares have a premium listing. Note that there are further requirements for issuers of debt and specialist securities.
For each matter, it is suggested that the following are noted:
- The identity of the person who approves the announcement or other notification/disclosure obligation.
- Whether and when the disclosure committee signed off on the announcement or other notification/disclosure obligation.
- The identity of the person who ultimately filed the announcement or other notification/disclosure obligation.
DTRs - Inside information and insider lists
Matter | Notification/disclosure obligations | Rule reference |
Inside information. | Immediate announcement, unless can be delayed. Note that the issuer must ensure that the disclosure of inside information to the public is synchronised in all jurisdictions in which the issuer has listed securities. | DTR 2.2.1R, DTR 2.5.6R, DTR 2.4, DTR 6.3.4R and DTR 6.3.10R. |
Largely accurate press speculation or market rumour relating to inside information. | Immediate announcement. | |
Danger of inside information relating to the facts and impact of an unexpected and significant event leaking into the market before they can be confirmed. | Holding announcement. | |
Announcement of inside information has been delayed and an actual or likely breach of confidence relating to that information has occurred. | Holding announcement. | |
All inside information notified to an RIS. | Simultaneous (or slightly later) publication on issuer's website. | |
Insider lists. | If requested by the FCA, must be provided to the FCA as soon as possible. Therefore, insider lists must be maintained at all times. |
Listing Rules and DTRs
PDMRs
Matter | Notification/disclosure obligations | Rule reference |
Changes to the board, including appointments, resignations and changes to a director's role and details. | Announcement no later than end of the business day following the decision in the case of appointments, resignations and changes to the role. Announcement within five business days of appointment regarding details of public directorships, unspent convictions and bankruptcies/liquidations. Announcement as soon as possible regarding changes to directors' details, including new directorships in publicly quoted companies. | |
Share dealings by PDMRs. | Announcement no later than end of business day following receipt of information by company. Note that if clearance is given to deal in exceptional circumstances (pursuant to paragraph 9 of the Model Code) in a close period, the announcement required by DTR 3.1.4R must include a statement of the exceptional circumstances. | DTR 3.1.4R and LR 9.2.10R. |
Information regarding a director's or his connected persons interest notified to the company under a section 793 notice. | Announcement no later than end of business day following receipt of information by company. |
Shareholders and shareholder communications
Matter | Notification/disclosure obligations | Rule reference |
Significant holdings of shareholders. | Announcement no later than end of the trading day following receipt of the notification. | |
Non-routine circulars. | Prior approval from FCA required before circulation/publication; must be submitted at least 10 clear business days before intended publication date. | |
All circulars and other documents to which the Listing Rules apply. | Two copies must be lodged with the FCA for publication through the document viewing facility at the same time as they are published. (Note that from 1 September 2010, the requirement to send documents to the FCA is fulfilled by forwarding one copy of each document electronically by an upload facility or by e-mail to the National Storage Mechanism (NSM) (they must not be sent to the FCA)). Announcement must be made without delay once documents have been submitted for publication through the document viewing facility (unless full text of document is provided to RIS). | |
All shareholder resolutions that have been passed (except those concerning ordinary business at an AGM). | Announcement as soon as possible after resolutions have been passed. Two copies must be lodged with the FCA for publication through the document viewing facility without delay after relevant general meeting. (Note that from 1 September 2010, the requirement to send documents to the FCA is fulfilled by forwarding one copy of each document electronically by an upload facility or by e-mail to the NSM (they must not be sent to the FCA)). Announcement must be made without delay once resolutions have been submitted for publication through the document viewing facility (unless full text of document is provided to RIS). | |
Details of meetings, number of shares and number of voting rights. | Information must be provided to shareholders. | |
Details of allocation and payment of dividends and the issue of new shares. | Notices and circulars must be published or circulated to shareholders. |
Company details and share capital structure
Matter | Notification/disclosure obligations | Rule reference |
Change of name. | Announcement as soon as possible. Send copy of Companies House certificate of change of name to the FCA. | |
Change of accounting reference date. | Announcement as soon as possible. Where accounting period is extended by more than 14 months a second interim report must be published. | |
Proposed changes to constitution. | Notification of draft amendments to the FCA and the LSE's Main Market without delay (but at the latest by the date of the general meeting). | |
Details (and changes to such details) of sponsor and company's Listing Rule compliance officer(s). | Notification to the FCA. In the case of the sponsor's details, such notification must be made promptly, unless the sponsor has resigned or been dismissed in which case the notification must be made immediately. | |
Proposed changes to capital structure, redemptions of shares and results of new issues. | Announcement as soon as possible. | |
Allotment of shares as part of a capitalisation issue in respect of a company’s holding of treasury shares. | Announcement by no later than 7:30 a.m. on the business day following the calendar day on which the allotment occurred. | |
Increase or decrease in the total number of voting rights of each class of issued share. | Announcement at end of calendar month unless the increase or decrease is material in which case it must be made no later than the end of the business day following the day on which the increase or decrease occurs. | |
Changes in rights attached to shares or derivatives issued by the company giving access to shares. | Announcement without delay. | |
New loan issues and any guarantee or security for such issues. | Announcement without delay. | |
Cancellation of listing. | Announcement at the same time as shareholder circular is published/circulated (must be at least 20 business days before intended cancellation). Another announcement once shareholder approval obtained. | |
Formal request to cancel or suspend listing. | Request to the FCA regarding cancellation must be made not less than 24 hours before the cancellation is expected to take effect and, regarding suspension, must be made as soon as practicable. Notification to the FCA as soon possible after request to the LSE for cancellation/suspension has been made or when listing of any securities is cancelled or suspended. | |
Disposals under and amendments to any lock-up arrangements. | Announcement as soon as possible. |
Dividends
Matter | Notification/disclosure obligations | Rule reference |
Payment of any dividend or withholding of any dividend or interest payment on listed securities. | Announcement as soon as possible after decision made by the board. | |
Details of allocation and payment of dividends. | Notices and circulars must be published or circulated to shareholders. |
Financial statements and annual report and accounts
Matter | Notification/disclosure obligations | Rule reference |
Half yearly financial report. | Made public as soon as possible after end of period to which report relates and in any case within two months. | DTR 4.2.2R and DTR 6.3.5R. |
Preliminary statement. | If prepared must be published as soon as possible after it has been approved by the board. (Must be agreed with the company's auditors before publication.) | |
Annual report. | Made public within four months of the end of the financial year. Announced in unedited full text (if applicable) indicating on which website the report is available. | DTR 4.1.3R and DTR 6.3.5R. See LR 9.8 for the content requirements of the annual report. |
Transactions
Matter | Notification/disclosure obligations | Rule reference |
Share buybacks. | Announcement as soon as possible of:
Circular approved by the FCA and sent to shareholders where the purchase is to be made from a related party or use of the full authority to be sought would result in the purchase of 25% or more of the issued share capital (not including treasury shares). Announcement if issuer acquires or disposes of its own shares and as a result its percentage holding of voting rights reaches, exceeds or falls below 5 or 10% of the voting rights. | |
Class 1 transactions. | Announcement as soon as possible once terms agreed. Circular approved by the FCA and sent to shareholders. | |
Class 2 transactions. | Announcement as soon as possible once terms agreed. | |
Related party transactions. | Announcement as soon as possible once terms agreed. Circular approved by the FCA and sent to shareholders. | |
Smaller related party transactions. | Announcement as soon as possible upon entering into transaction. Confirmation from the sponsor that the transaction is fair and reasonable. | |
Rights issues and open offers with compensatory element. | Announcement as soon as possible of principal terms and results of issue/offer. | |
Placings, open offers and offers for subscription. | Announcement as soon as possible after the terms have been agreed. |
Appendix 3: Communications policy
A written communications policy provides a useful discipline that ensures that contacts with shareholders, analysts and the media are conducted in compliance with the requirements of the DTRs.
A communications policy may cover:
- Overall approach to communications (including use of the Chairman's address to the AGM, webcasts and conference calls) with insertions, including contents of annual report (and any voluntary OFR) and timing of trading update.
- Responsibility for communications.
- Who is responsible for signing off regulatory announcements (that is, announcements released to an RIS), slides for presentations and speeches.
- Guidance on when to involve advisers and relevant contact details.
- A (periodically reviewed) "sensitivity list" of information likely to be inside information.
- Who is responsible for verification of the information.
- Required forms of rubrics to be used in appropriate cases (for example, a forward-looking statements warning).
- Process for keeping and updating a log of material forward-looking statements.
- Summary of requirements under the DTRs and other applicable rules and regulations (for example, SEC filings required).
- Policy for dealing with analysts (for example, whether or not draft reports will be reviewed and on what basis; the extent to which analysts' questions should be answered; and how meetings should be conducted).
- Policy on communications during a close period.
- Policy on dealing with rumours and speculation.
- Use of health warnings.
- Procedures to be followed where there is a leak of inside information, including pro forma draft announcements.
- Policy regarding the website, including information to be made available, disclaimers and restrictions to be used.
Market Watch 37 sets out best practice recommendations for dealing with the media. These recommendations cover:
- Media policies.
- Verbal communications.
- Written communications.
- Handling leaks.
- Training staff.
- Communications with staff.
- Establishing a reporting culture.
- Disciplinary action.
Most of these recommendations apply to either regulated or unregulated advisers (for example, PR advisers and printers), though the FCA indicates that issuers may wish to apply them if they feel it appropriate to meet their obligations. Issuers should, however, note the following:
- Internal policies at the issuer should make it clear that if there are any concerns that inside information has already been leaked (such as if a journalist appears to already have the inside information), these concerns should be escalated immediately to the compliance department for consideration as to whether an announcement needs to be made under the DTRs.
- Issuers should agree with their advisers as to who will take the lead role in any leak enquiry, though the FCA indicates its preference that this should be the issuer itself. Issuers should then seek regular updates from their advisers (both regulated and unregulated) as to the progress of any investigation.
Appendix 4: Responsibility for reviewing information
The following sets out examples of areas from which inside information may arise connected to trading, events and projects. It also sets out the roles and responsibilities for reviewing this information and the escalation path. Each organisation will have its own sources of information to complete the chart. Further examples are set out in Appendix 1: Compliance Procedures checklist and project plan. It may be important that business units are informed that there are required processes to highlight ad hoc matters, which are material to their business or which may impact KPIs, in their reports.
Activity/Event/ Project (column 1) | Responsibility for review (column 2) | Escalated to (column 3) | Responsibility for announcement or to delay (column 4) | |
Trading | Monthly flash report | |||
Events | Compliance report | |||
Projects | Establishment/ termination of projects |
Roles and responsibilities of reviewers
Column 2 reviewers will:
- Review information provided under column 1.
- Consider whether the information is material to the business unit in question and if the answer is yes or maybe, immediately advise the person(s) responsible for escalation shown in column 3.
- For projects, consider whether they are or have the potential to become inside information and inform the person responsible for escalation of the reasons. The procedures laid down in "Chinese Walls Procedures" shall be followed in respect of projects.
- If the information is not considered material, make a file note of why it is not.
- Provide feedback on how the matter that was escalated has been dealt with.
Roles and responsibilities of persons to whom information is escalated
Column 3 persons will:
- Consider the information received from the column 2 reviewers.
- Establish whether information falls or could fall within the definition of inside information.
- Seek external advice if appropriate. For projects or events which have the potential to become inside information, give instructions to start an insider list and to prepare a leak announcement.
- Convene the relevant people to consider the announcement or the rationale for why no announcement is required.
- Record decision with rationale.
Final decision
Column 4 persons who are in the final approval forum/Disclosure Committee will:
- Consider whether an immediate announcement is necessary and whether there can be a delay.
- Seek external advice if appropriate.
- Have drafted and verified an appropriate full, holding or leak announcement as required.
- Approve the publication of the announcement.
- Record its decisions and rationale.
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