No room for FDs to hide

Since N2, the FSA has had the power to fine finance directors for saying the wrong thing, or the right thing at the wrong time – which means it’s high time you sorted out your disclosure policy.

John Mayo, former Marconi FD and ousted chief executive-designate is in no doubt: the Marconi board made a mistake on 4 July last year when it opted to suspend the shares for a day rather than reschedule a crucial 4pm board meeting as a 6am conference call.

The problem was that Marconi had some good news it could release immediately – the disposal of the medical products division – but it needed the board to agree the wording of a profits warning, and that couldn’t be sorted out until the afternoon. ‘If the company had announced good news in the morning and bad news in the evening, there would have been a false market in the shares for a whole day,’ he recently told the Financial Times.

‘But that (share price) suspension stoked up every possible rumour that the business was in trouble.’

Mayo, with his career background in investment banking at Warburgs, knew better than most FDs of the regulatory burdens governing the disclosure of price-sensitive information. But as conscious as he was of the stock exchange rules, the consequences for getting it wrong would have been greater had the events taken place after 30 November – the Financial Services Authority’s so-called N2 Day, when new rules and powers came into force.

For one thing, under the new regulatory environment companies and directors themselves can be named and fined by the FSA if they fail to keep shareholders informed. This would seem to make sense, especially as fining a company when its share price has collapsed only penalises investors further. Moreover, the new rules governing ‘market abuse’ effectively operate under civil law, not criminal, so the burden of proof and rules of evidence make it easier for the prosecuting regulator.

So what is ‘market abuse’? For FDs, the main aspect concerns failing to disclose price-sensitive information or making selective disclosure of information to favoured analysts or journalists.

Even dissemination through the Regulatory News Service in a way that is misleading will turn out to be market abuse if it means telling half the story such that people buy shares they would have otherwise sold.

Selective disclosure became a hot topic in the US in 2000 when the Securities and Exchange Commission introduced ‘Regulation FD’ to stamp it out. One of the SEC’s concerns was that companies excluded from meeting analysts who adopted a negative stance on their shares – but still invited other analysts to attend. (A recent Tempest Consultants survey said that 22% of UK companies admit they temporarily exclude analysts from briefings and company visits if they produce ‘sell’ circulars.)

In finalising Regulation FD the SEC also referred to conflicting views on the effectiveness of rules designed to ensure information is released promptly and equally to all market participants: it acknowledged fears that companies may simply stop talking so as to prevent accusations of selective disclosure.

But on balance the SEC didn’t think such this was likely to be a problem.

‘The marketplace simply would not allow companies to cease communications with analysts,’ it concluded.

In the UK, the most important document is the PSI Guide, an appendix to the UKLA Guidance Manual governing the release of price-sensitive information.

While it’s largely based on rules that have been around for some years, the power the FSA now has to levy fines and impose compensation orders on companies, directors and advisers will make them all even more careful to abide by it – especially since there is no published tariff of fines and the FSA can levy a charge as big as it likes.

The basic rule is, if you have price-sensitive information, get it out.

If there are reasons why you can’t do so straight away, then you’re allowed a short delay, but the FSA isn’t particularly sympathetic to arguments about why information wasn’t released immediately. FDs should also ensure they have the right systems and procedures in place to ensure price-sensitive information comes up through the corporate ranks to enable the board to make an announcement.

It’s not going to be a defence for a director of a company to say, ‘No one ever told me,’ if, in fact, it was his responsibility to ensure he was told. There’s nothing much anyone can do if someone down the chain of command hides this kind of information from the FD – but it is imperative to make sure everyone knows that nobody other than the relevant people should talk to the press.

• Andrew Sawers is the editor of Financial Director