Primary Market Bulletin 33

Newsletters Published: 29/03/2021 Last updated: 29/03/2021

Newsletter for primary market participants

March 2021 / No. 33

About this edition

Welcome to the 33rd edition of the Primary Market Bulletin (PMB) and the first for 2021.

This is a packed edition, featuring Brexit-related changes for EEA audit firms, information on Short Selling Regulation notification compliance, our recent Enforcement outcome against Asia Research and Capital Management Limited and details of our new online portal for submitting major shareholdings notifications (TR-1 Form) which went live on 22 March 2021.

It also includes our review work on issuers’ compliance with major shareholding notifications and deficiencies observed in reporting total voting rights, annual FCA reporting requirements of payments to governments and our response to feedback received on Delayed Disclosure of Inside Information (see PMB 31).

What's new

Brexit update

Audit of financial statements by EEA audit firms

Audit firm registration

From 11:00pm on 31 December 2020 all EEA States became third countries following the end of the transition period. This has practical implications for all third country (including EEA) issuers which have transferable securities admitted to trading on a UK regulated market and whose auditors are from an EEA State. If you are one of these issuers, your auditors will have to register as 'third country auditors' with the UK’s Financial Reporting Council (FRC) in time for the publication of annual financial statements for financial years beginning on or after 1 January 2021. For more information on how your auditors can register, please refer to the advice from the FRC here. If your auditors do not register, then the financial statements won’t be audited for the purposes of compliance with DTR 4.1.7R (auditing of financial statements).

EEA Audit equivalence

On 9 November 2020, the Department for Business, Energy and Industrial Strategy announced regulations to grant audit equivalence to the EEA States and approve as adequate their audit competent authorities. See the policy paper HM Treasury equivalence decisions for the EEA States for full details of the announcement. Where audit work is undertaken by an EEA auditor, an issuer’s financial statements will be considered to be audited for the purposes of DTR 4.1.7R, as long as the EEA auditor is registered with the FRC.

Major shareholding notifications

Changes to reporting of major shareholdings notifications

Chapter 5 of the Disclosure Guidance and Transparency Rules (DTR 5) requires holders of shares with voting rights attached and certain financial instruments to notify us and the relevant issuer when certain thresholds are reached or crossed. These notifications were sent to us by submitting Form TR-1 (Standard form for notification of major shareholdings) to [email protected].

New online portal for TR-1 Form notifications

As we continue to improve our services, we reviewed the notification process and have developed a new online portal to allow holders of shares with voting rights attached and certain financial instruments to submit TR-1 Forms via our Electronic Submission System (ESS).

Under the new process, holders and persons reporting on their behalf will be required to complete a 2-step registration to get access to ESS and the new ‘Major shareholding’ reporting section within that system. To submit notifications to us, holders must complete an electronic TR-1 Form. This will be available on the ‘Major shareholding’ reporting section of ESS.

The new online portal went live on 22 March 2021 and after this date TR-1 Forms are not accepted by email. Only notifications sent via our new portal (ie via ESS) will be considered for the purpose of monitoring compliance with the reporting requirements under DTR 5.

However, notifications for the market making exemption (TR-2 Form) and other exemptions available to certain investors under DTR 5 submitted to [email protected] will still be accepted.

Benefits of the new DTR 5 portal

The new online portal is a more efficient way to give us information on holdings of voting rights in issuers and will give holders and their reporting persons the ability to:

  • search the system by ISIN and issuer name
  • complete and download an electronic TR-1 Form, that can be also sent to the issuer of the relevant shares for publication via a regulatory announcement
  • upload CSV files to report holdings of voting rights held via financial instruments
  • access reference numbers on completion of submissions
  • search and view historical TR-1 Form submissions and amend them at any time
  • create a ’My Notifications’ bookmark to view the notifications relevant to holders and persons reporting on their behalf

For further details on how to register on ESS and submit your electronic TR-1 Form notifications to us, please visit our Shareholding disclosure and notification page.

Short Selling Regulation

Timely disclosures of Net Short Positions

On 14 October 2020, the FCA published a Final Notice against Asia Research and Capital Management Limited (ARCM), and imposed a penalty of £873,118 for the failure to disclose over 150 notifications related to its net short position (NSP) held in Premier Oil Plc. On 5 July 2019, ARCM reached a NSP of 16.85% of Premier Oil’s issued share capital. This position was built over 2 years and resulted in the largest NSP held in a listed issuer in the UK. ARCM submitted delayed NSP notifications to the FCA on 3 December 2019. This is the first enforcement action we have taken for the failure to disclose NSPs in a timely manner, as required under the Short Selling Regulation (SSR).

This sent a strong message to investors with reportable NSPs under the SSR and we remind investors of their notification and disclosure obligations under the SSR and reiterate why their timing and accurate notifications to us is important for the market.

Importance of net short position disclosure

Following the end of the transition period, the SSR was converted into domestic law (UK SSR). The purpose of the short selling regime is to improve transparency within financial markets and enhance market integrity. Short selling activity can play an important role in ensuring the proper functioning of financial markets. It can contribute to market liquidity and efficient price formation. However, to support that, it is important that persons undertaking short selling activities ensure that they meet their obligations under the UK SSR, to provide appropriate transparency on short selling activities to the market and to support the orderly functioning of the market. 

Persons failing to comply with their obligations under the UK SSR can potentially disrupt the orderly functioning of financial markets. For example, failure to comply affects our ability to monitor short selling activity and market participants’ ability to use accurate public disclosure of net short positions to make informed investment decisions. We use this opportunity to remind market participants of the importance of making timely and accurate disclosure of their NSPs to us.

Reportable net short positions and UK sovereign debt

From 1 February 2021, the Short Selling (Notification Thresholds) Regulations 2021  (the Regulations) reduced the notification threshold under Article 5(2) of the UK SSR from 0.2% of the issued share capital of an issuer that has shares admitted to trading on a UK trading venue (UK Regulated Market and UK Multilateral Trading Facility) to 0.1%. Accordingly, an NSP is reportable to us when it reaches 0.1% of the issued share capital of a company that has shares admitted to trading on a UK trading venue and at every 0.1% increment thereafter.

Under Article 6 of the UK SSR, an NSP in such shares must be made public when it is equal to or greater than 0.5% of a company’s issued share capital. Public notifications submitted to us are made available here on our daily update spreadsheet.

The UK SSR also requires NSP disclosures for holdings of sovereign debt and sovereign credit default swaps.

Short position and scope of instruments

The UK SSR states that ‘a short position includes a transaction in financial instruments related to a share which gives the effect of conferring a financial advantage on the person entering it in the event of a decrease in the price of the share’. This includes positions held in derivatives such as equity swaps and contracts for difference relating to shares.

Restrictions on uncovered short sales in shares

The UK SSR restricts uncovered short sales in shares to prevent ‘naked’ short selling, which can harm market integrity and disrupt settlement. To meet their obligations under the UK SSR, market participants must ensure that they only enter into a short sale of a share where they have borrowed shares or entered into an agreement to borrow shares, or have an arrangement with a third party who confirms that the shares have been located. 

Notification timings

Under Article 9 of the UK SSR, NSP calculations should be conducted at midnight on the day of the transaction. A notification reportable to the FCA should be submitted no later than 15:30 on the next trading day after the position was reached.

How to submit Net Short Position Notifications to us

A NSP notification can only be submitted to the FCA using our Electronic Submission System (ESS) portal. An ESS account is needed to access this system. Once an account is created and approved, a registration request to be a reporting person on behalf of a position holder can be submitted.

For more information on how to register and submit notifications, please see our SSR pages and registration user guide here.

Consultation feedback and changes to the Knowledge Base

Schemes of arrangement

We continue to consider responses to draft Primary Market/TN/606.1 – When a prospectus is required where securities are issued pursuant to Schemes of Arrangement, published in PMB 30.

We note that respondents felt that a prospectus is not required even where a scheme includes mix and match facilities. We are considering these responses and will provide further information in a future PMB.

Review of net changes to share capital: total voting rights and major shareholding disclosures

In 2020, we conducted a review of the way that UK issuers announced changes to total voting rights and the effect on major shareholding notifications. We identified several issues to highlight for market participants.

The sample selected for the review was based on issuers of securities that had disclosed increases or decreases to their share capital in their financial statements during the period January 2017 to July 2020. Where changes occurred we assessed whether the expected notifications of changes in total voting rights and changes to major shareholdings (as a result of a change to the total voting rights) were disclosed to the market in accordance with the requirements of DTR5.

Applicable Rules

DTR5 imposes obligations on issuers whose shares are admitted to trading on:

  • a regulated market (such as the LSE Main Market)
  • a prescribed market (such as LSE AIM or the AQSE Growth Market), and who are incorporated in and having a principal place of business in the United Kingdom in relation to the disclosure of total voting rights 

It also imposes requirements on persons holding voting rights in those issuers.

DTR 5.6.1R – Total voting rights

An issuer must, at the end of each calendar month during which an increase or decrease has occurred, disclose to the public:

(1) the total number of voting rights and capital in respect of each class of share which it issues.

(2) the total number of voting rights attaching to shares of the issuer which are held by it in treasury.

DTR 5.6.1AR – Disclosure of total voting rights following completion of transaction

(1) Notwithstanding DTR 5.6.1 R, if a relevant increase or decrease in the total number of voting rights of the kind described in (2) occurs, an issuer must disclose to the public the information in DTR 5.6.1R (1) and (2) as soon as possible and in any event no later than the end of the business day following the day on which the increase or decrease occurs.

(2) For the purpose of (1), a relevant increase or decrease is any increase or decrease in the total number of voting rights produced when an issuer completes a transaction unless its effect on the total number of voting rights is immaterial when compared with the position before completion.

DTR 5.6.1B G –Material changes to voting rights

In relation to the obligation in DTR 5.6.1A R, it is for an issuer to assess whether the effect on the total number of voting rights is immaterial. In the FCA's view an increase or decrease of 1% or more is likely to be material, both to the issuer and to the public.

DTR 5.1.2R – Major Shareholdings

A person must notify the issuer of the percentage of its voting rights he holds as shareholder or holds or is deemed to hold through his direct or indirect holding of financial instruments falling within DTR 5.3.1R (1) (or a combination of such holdings) if the percentage of those voting rights:

(1) reaches, exceeds or falls below 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10% and each 1% threshold thereafter up to 100% (or in the case of a non-UK issuer on the basis of thresholds at 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%) as a result of an acquisition or disposal of shares or financial instruments falling within DTR 5.3.1 R; or

(2) ​​​​​​reaches, exceeds or falls below an applicable threshold in (a) as a result of events changing the breakdown of voting rights and on the basis of information disclosed by the issuer in accordance with DTR 5.6.1R and DTR 5.6.1AR;

and in the case of an issuer which is not incorporated in the United Kingdom a notification under (b) must be made on the basis of equivalent events and disclosed information.

DTR 5.1.3R (4) and DTR 5.1.5R provide exemptions allowing a reporting threshold of 5% for certain investment firms, agents and credit institutions.

DTR 6.2.2R – Filing of information with the FCA

An issuer or person that discloses regulated information must, at the same time, file that information with the FCA.

DTR 6.2.2AR – Filing of information with the FCA

Where an issuer or person is required to file regulated information under DTR 6.2.2R, the issuer or person must, at the same time, notify the following to the FCA:

(1) the legal entity identifier (LEI) of the issuer concerned; and

(2) the classifications relevant to the regulated information using the classes and sub-classes in DTR 6 Annex 1.

DTR 6.2.2BR – Filing of information with the FCA

If more than one classification is relevant to the regulated information, the issuer or person must notify all relevant classes and sub-classes to the FCA.

(‘Total number of voting rights and capital’ should be used for all information disclosed under DTR 5.6.1R and DTR 5.6.1AR).

Methodology

The 19,933 total voting rights announcements made between 1 Jan 2017 and 1 July 2020 (according to the National Storage Mechanism (NSM)) were matched to the relevant issuers. This resulted in the identification of 549 relevant issuers in scope of DTR5 which had not produced announcements headlined ‘Total Voting Rights’ in the period under review.

Within the resulting 549 issuers we identified those with a change in total voting rights over the period of more than 1%, resulting in a population of 261 securities. We then selected a sample of 100 issuers from this list that included all companies admitted to the Official List and the largest AIM and AQSE Growth Market companies.

We analysed the regulatory announcements of all 100 issuers in the sample for the period to:

  • locate information relating to the changes to total voting rights
  • where an announcement containing total voting rights had been made, assess whether major shareholders had disclosed resulting changes to their holdings, assuming that the number of shares held by these holders had not changed.

Results of Review

Total voting rights announcements

We located information on the changes to total voting rights in 99 cases.

While this superficially indicates that the overall level of compliance is good, we were concerned that some disclosures of total voting rights lacked clarity and there are several issues we want to bring to issuers’ attention:

  • New total voting rights figures following the changes to share capital were reported in several ways, often without mentioning total voting rights or referencing the applicable DTR rules at all. Issuers should ensure that all financial instruments to which voting rights are attached are included in the calculation of the total voting rights figure.
  • A significant minority of issuers failed to use the appropriate announcement headline to report new total voting rights figures or reported this information as a part of another announcement regarding an acquisition or disposal of shares by the issuer. Immediate disclosure of voting rights following an acquisition or disposal of shares by an issuer in accordance with DTR 5.5.1R and DTR 5.6.1AR does not exempt the issuer from the obligation to report a new total voting rights figure at the end of the calendar month.
  • Often, information regarding new total voting rights was disclosed as a part of proposed or conditional equity placing announcements or share repurchases, before these transactions were formally approved or took place. This does not exempt an issuer from the obligation to report a new total voting rights figure following settlement and at the end of the calendar month.

Impact on Major Shareholding notifications

We identified 386 major shareholding positions that had potentially crossed reportable thresholds. Standard forms for notification of major shareholdings (TR-1 Forms) were submitted for 248 of these positions.

Therefore, assuming a 3% disclosure threshold for all issuers, among the population we identified up to 138 instances where major shareholders had not disclosed their new positions after the change to the total voting rights. Applying a 5% disclosure threshold (which applies in practice to only to a subset of holders under DTR 5.1.3R (4) and DTR 5.1.5R), this reduced the number to 77 instances.

While there may be reasons why some of these notifications did not occur, for example where holders participated in an issuance pro rata to their existing holdings, our results suggest that several major shareholding notifications were not submitted.

Conclusion and Recommendations

Knowledge of the major shareholdings in companies is an important piece of market transparency and we are concerned that a significant number of major shareholding notifications are not being made. While the proportion of issuers making their total voting rights available in some form was high, we believe that the lack of clarity from issuers regarding their total voting rights is contributing to the level of missing notifications by major shareholders.

As a result of this review, we would like to:

  • remind position holders that DTR 5.1.2R(2) places a responsibility on them as shareholders to assess whether their position has changed as a result of an event changing the breakdown of voting rights
  • remind issuers to report changes to total voting rights clearly and on time as required by the DTR:
  • to report total voting rights at the end of each calendar month during which an increase or decrease occurred, even if this information was disclosed before in accordance with DTR5.5.1R and DTR5.6.1AR
  • to report total voting rights figures as a distinct announcement, use ‘Total Voting Rights’ as a headline and to select the proper classification of regulated information as ‘Total number of voting rights and capital’ in accordance with DTR 6.2.2AR, DTR 6.2.2.BR and DTR 6 Annex 1R

 

Review of payments to governments disclosures by issuers in the extractive industries

In 2020, we conducted a review of disclosures by UK issuers for the financial year ending 2019 (FY2019), for the requirements set out in DTR 4.3A. We identified several issues to relay to the market. 

Background

Issuers active in the extractive or logging of primary forest industries have been required to produce a standalone report annually disclosing their payments made to governments for each financial year. The requirements are set out in DTR 4.3A (The requirements in DTR 4.3A have been extended to certain listed companies by LR 9, LR 14, LR 15, LR 18 and LR 21.).

In 2019, we conducted a series of reviews for DTR 4.3A and shared our results and concerns in PMB 20. In 2020, we conducted another review and our feedback is below.

Rules

Before the end of the transition period (the reports covered by the review were published prior to the end of transition period) issuers were required to comply with DTR 4.3A if:

  • they were active in the extractive or logging of primary forest industries 
  • they had transferable securities admitted to trading on an EU regulated market (including debt instruments and depository receipts)
  • their Home State for Transparency Directive purposes was the UK

Certain listed companies (premium listed companies other than open-ended investment companies and companies with a standard listing of shares or depository receipts) which were not already required to comply with the Transparency Rules, or with corresponding requirements imposed by another EEA Member State, were also required to comply with DTR 4.3A as if they were an issuer for the purposes of the Transparency Rules.

After the end of the transition period, issuers are required to comply with DTR 4.3A if:

  • they are active in the extractive or logging of primary forest industries
  • they have transferable securities admitted to trading on a UK regulated market

Certain listed companies (premium listed companies other than open-ended investment companies and companies with a standard listing of shares or depository receipts) which are not already required to comply with the Transparency Rules are also required to comply DTR 4.3A as if they were an issuer for the purposes of the Transparency Rules.

We remind issuers once again of the main requirements (summarised below) where we saw the biggest deviation from the rules.

1. Payment threshold

A payment, whether made as a single payment or as part of a series of related payments within a financial year, doesn’t need to be covered in the report if it is less than £86,000. However, the absence of any qualifying payments in the relevant period does not exempt an issuer from production of a report.

2. Production, publication and filing of a report

Listed issuers that are in scope of DTR 4.3A should disclose payments made to governments in a standalone report which must be made public at the latest 6 months after the financial year-end (the Payments to Governments Report). The report must be filed in XML format as required by DTR 4.3A.10R.

3. Equivalence

No determinations of equivalence have been made by the FCA in respect of the rules in DTR 4.3A for the purposes of DTR 4.4.8R in relation to any non-EEA State or third country, either before or following the end of the transition period. Therefore, the exemption in DTR 4.4.8R is not available in relation to the rules on reports on payments to governments set out in DTR 4.3A and all issuers within scope of DTR 4.3A are therefore required to comply with those rules.

4. Content of the report

The Payments to Governments Report should always include the following:

  • breakdown by payment type
  • breakdown by project (where payments have been attributed to a specific project, the total amount per type of payment for each such project and the total amount of payments for each such project)
  • breakdown by government (including any national, regional or local authority, department or agency)

Outcome of the Review

The main points arising from our review are as follows:

  • When using the National Storage Mechanism (NSM) to file the Payments to Governments Report, issuers should be aware that uploading the report in human-readable format alone (and not also in XML format using the prescribed XML data schema) is not enough to meet the DTR 4.3A requirements. This concerns us, as reports in XML format were located for only a minority of issuers in scope of our review.
  • We identified that nearly a fifth of Payments to Governments Reports reviewed were missing sufficient breakdowns by project.
  • Over 10% of all Payments to Governments Reports for the period were not filed with the NSM, which is required by DTR 4.3A.10R (filing of reports on payments to governments).
  • Several Payments to Governments Reports were disclosed as a part of the annual financial report rather than as a standalone report.
  • Several issuers in scope omitted publication of the report stating that no payments have been made, or payments have been below the threshold. This does not exempt them from the obligation to prepare, publish and file a report, disclosing this information.
  • Several issuers in scope omitted publication of the report stating they are exempt on the basis of similar filings. We remind issuers that no determinations of equivalence have been made by the FCA in respect of DTR 4.3A. Therefore, all issuers within scope of DTR 4.3A are required to comply with those rules.

Conclusion and Recommendations

We have opened preliminary enquiries (The Enforcement Guide (EG), 2.7 Sources of cases) into several issuers’ compliance with DTR 4.3A. Overall, we are concerned that compliance did not improve markedly after our previous review. We will revisit this review in the future and assess whether stronger interventions are required (including, where appropriate, enforcement investigations).

Feedback on Review of Delayed Disclosure of Inside Information

In PMB 31, we published Review of Delayed Disclosure of Inside Information (the Review). Since the review’s publication we received several queries. We welcome this feedback and set out our response below.

Background

The Review covered notifications received over a 17 month period ending in November 2018. The notifications were categorised by certain types of inside information and we added price movements of the date of publication of the information.

The article did not contain any new guidance and it was not our intention to drive wholesale change to market practice. However, the results may indicate that pockets of poor practice still exist. We are concerned about the low overall volume of notifications and the potential that some issuers are not aware of the requirement to notify the FCA where an issuer has delayed disclosure of inside information under Article 17(4) of the Market Abuse Regulation (MAR).

While compliance with the notification regime doesn’t guarantee an issuer’s compliance with MAR, a clear understanding of the existence of inside information and the rationale for its delay are necessary both to make a notification and to comply with the regime more broadly.

Periodic financial information

FCA guidance for periodic financial information and Article 17(4) of MAR is contained in Technical Note 506.2. We received some feedback that the dataset we used covered a period prior to this publication.

The Review repeated existing FCA guidance which encourages issuers to begin with the assumption that information relating to financial results could constitute inside information and states that the FCA expects issuers to exercise judgement in assessing whether inside information exists. The Review was not intended to change this guidance.

The factors that we highlighted in the Review do not indicate that we wished to challenge market practice. This practice might reasonably be expected to involve considerations like the extent to which:

  • The periodic financial information contains an item or items that are themselves inside information for which no legitimate interest to delay disclosure exists, Article 17 of MAR requires that the inside information is announced without delay. Where there is no delay in disclosure of inside information or no inside information exists, no notification under Article 17(4) of MAR would be required.
  • The totality of the periodic financial information is inside information. This typically includes an assessment of whether the results and other content differ from market expectations, where such expectations can be ascertained. Where a decision is reached that periodic financial information is not itself and does not contain inside information no notification needs to be submitted.

Board changes

We received some feedback about challenges with complying with Article 17 of MAR in the context of board changes. Comments were around the extent to which information is ‘precise’ for the purposes of Article 7 of MAR and also noted the desire among issuers to present an orderly transition.

We appreciate the ‘precise’ definition requires judgement and this is factored into our surveillance, monitoring and case selection when considering potential investigation via our enforcement division. However, with regard to the desire to present an orderly transition, our view remains as contained in Technical Note 521.3:

'It is generally not acceptable for issuers to attempt to choreograph the assessment and possible disclosure of various and offsetting information that may individually meet the tests for inside information. It is vital that issuers disclose all inside information they have in accordance with MAR and do not attempt to delay the publication of negative news, for example, until there is offsetting positive news’.

Share price movements

Further feedback noted the approach we took when assessing the share price impact of the announcements (how we logged the price impact only on the day of announcement). A query was raised on whether the results showed an incomplete picture.

We considered this as part of our work and can confirm that our methodology accounted for announcements disclosed outside of trading hours – which represented a small proportion of the notifications. All announcements disclosed on non-trading days were automatically adjusted to reflect closing price percent change between the latest trading day before to the announcement and the latest trading day afterwards.