ࡱ> []Z7 AbjbjUU 5b7|7|<l\\\\80T"UUUIKKKKKK$ oU3"UUUo_\\Y___Up\8(I_UI__]] `']]0]_]_\\\\ Fabrice Demarigny Secretary general CESR Paris Copy to: Hubert Grignon Dumoulin Internal Markets Directorate European Commission CESRs advice on possible Level 2 implementing Measures for the Proposed Prospectus Directive - October 2002. Response to Consultation Paper 27th January 2003 Dear M. Demarigny, Attached I provide my response to the consultation paper produced by CESR in October 2002. I am aware this response is after the deadline but I trust you will still consider it. Unfortunately the consultation was only drawn to my attention recently. This response is primarily based on the growing interest in social and environmental issues among the investment community. These do not appear to have been factored into the proposed regulations so far. This interest comes from: legislation requiring the consideration of such factors by pension funds and others; growing consumer interest in socially responsible investment funds; share prices that increasingly value brand, reputation and intangible assets; the increasing importance of corporate governance and risk management; continuing concern over the short termism of the markets; and new approaches to investment such as the universal investor. As a result social and environmental information is increasingly necessary for investors to make informed investment decisions. My response also attempts, more generally, to take account of the European Union objectives of environmental sustainability and social cohesion, both of which may be affected by these regulations something which is reflected in rising concern about the way the financial markets operate from a variety of other stakeholders, including government agencies. The response is split into for parts. Firstly, I make some general points. Secondly, I respond to some specific questions. Thirdly, I make some detail comments on Annex A. Finally, I look at some of the other Annexes. I commend them to your attention, Your sincerely, A. General Points In many cases the regulations require disclosure if something is material, or similar. While the use of this concept is understandable to avoid irrelevant disclosure and unnecessary burdens, practice, particularly in the United States, shows that it can be abused, with the result that information is not disclosed that should be, and directors discretion is too strong. Clear guidance should be provided on materiality, including the general concept that the onus should be on the issuer to establish that something is not material. In addition, regulations and practice should establish mechanisms for enforcing a robust interpretation of materiality. It is also worth noting, although slightly outside of the scope of this consultation, the need for adequate enforcement mechanisms. Firstly, the pre-approval checks need to be as thorough as possible. Secondly, if factors emerge after the event that should have been disclosed, regulators should not hesitate from using their enforcement powers, particularly on the directors and sponsors. This would also be the most effective way of encouraging good practice going forward. Existing practice appears to fall short of this. I would also like to state that I am very concerned about the consultation process. While I am aware that this is as a result of a timetable developed by the European Commission, good regulation is rarely developed in haste. This is particularly the case here as the regulations implement a Maximum Harmonisation directive and so should require even more care. Similarly, nothing in this response should be taken as endorsement of the prospectus directive itself, about which I have serious concerns. However, if it is to be implemented, then I believe my suggestions will at least provide some improvements. B. Answers to selected Questions. QUESTION 44. Do you agree with the disclosure obligations set out in Annex A? See table below. 46. CESR decided that a better approach would be to have a disclosure requirement for risk factors. But that CESR would later produce guidance on the sort of risk factors that might be expected to be included under this disclosure requirement. This guidance would be amended in the light of experience and future developments in the market. QUESTION 47. Do you agree with this approach? While recognising the difficulty of making risk disclosure requirements too specific, the current wording appears vague and inadequate. In particular, the wording make an offering speculative or high risk should be deleted. As written, issuers appear to have the option of claiming their issue is not high risk or speculative, so they do not need to disclose risks. All investment involves some risk. The purpose of this statement is to enable investors to decide on the level of risk. Furthermore, while recognising that providing detailed guidance may best be provided elsewhere it is still very appropriate in the Level 2 Requirements to state more fully what is required. Firstly, risk factors should be identified, their impact summarised, and information provided on how they are managed. Secondly, broad categories of risk factors should be identified (on a non-exclusive basis) at this level, rather than in guidance, to ensure proper consideration and enable enforcement. Consideration should be given to whether the desire to prominently disclose risks factors might conflict with the desire also for a proper discussion of risk impact and management. The risk factors section could be split into a summary of risks and a more detailed discussion. Question 89. Do you agree that such information [details of fraudulent offences, previous bankruptcies and/or public criticisms of directors] may be material to an investors decision to invest? Would the provision of such details breach privacy laws in your jurisdiction? The background of directors is highly relevant to the decision to invest and should certainly be seen as more important than the right of privacy in this context. The right of privacy of directors in this context should be seen as applying to their personal life not their business life. C: Detailed Comments on Annex A Note: where appropriate these suggestions should also be incorporated into the listing requirements for other types of issuance (e.g. debt). Text Original in Italics. Proposed Changes in plain Blue, sometimes highlighted.CommentsII.B Risk Factors.The document shall prominently disclose risk factors that are specific to the company or its industry and make an offering speculative or one of high risk, in a section headed "Risk Factors". Delete and replace with: The document shall prominently disclose risk factors that are specific to the company or its industry and may significantly affect the companys short or long term value in a section headed "Risk Factors". Such risks may include, but are not limited to, market, reputation, operating, financial, political, social, environmental and ethical risks. The document should describe how the risk factors might impact on the business and the companys policies and procedures for managing risks. If the company has no such policies and procedures, the document should provide reasons for their absence. The document should include information about the extent to which the company has complied with its policies and procedures for managing the risks identified.See comments above. The wording suggested is based on the wording of the Association of British Insurers Guidelines for disclosure of social and environmental issues.III.C.7 Summary information regarding the extent to which the company is dependent, if at all, on patents or licenses, industrial, commercial or financial contracts (including contracts with customers or suppliers) or new manufacturing processes, where such factors are material to the company's business or profitability. In particular, the document should disclose the nature and extent of any long term contracts, which, in aggregate, are material in extent and expose the company to pricing, cost or delivery risks.Exposure to fixed long term contracts has been a major factor in a number corporate collapses including power utilities, life insurance companies, and computing leasing. While accounting standards are being enhanced to address this, it should be an item for specific disclosure in the prospectus.III.C.9NEW: A statement outlining the significant social and environmental impacts of the companys operations and products as appropriate, and any material impact these may have on the capital expenditures, earnings and competitive position of the company and its subsidiaries.Loosely based on the SEC regulation S-K Reg. 229.101. Item 101. (c) (1) (xii), and also reflecting the French disclosure requirements in Decree N 2002-221 of February 20th, 2002III.E Property, Plants and Equipment. The company shall provide information regarding any material tangible fixed assets, including leased properties, and any major encumbrances thereon, including a description of the size and uses of the property; productive capacity and extent of utilisation of the company's facilities; how the assets are held; the products produced; and the location. Also describe any environmental or social issues that may affect the companys utilization of the assets. With regard to any material plans to construct, expand or improve facilities, describe the nature of and reason for the plan, an estimate of the amount of expenditures including the amount of expenditures already paid, a description of the method of financing the activity, the estimated dates of start and completion of the activity, and the increase of production capacity anticipated after completionWording based on the SEC 20-F for foreign issuers. Anglicise spelling!! Social added for completenessIV.A.5Provide information regarding any governmental economic, environmental, social, fiscal, monetary or political policies, proposed policies or factors that have materially affected, or could materially affect, directly or indirectly, the company's operations.Wording strengthened for completeness. Proposed policies would include green / white papers, international commitments not yet translated into law etc.IV.D.1Comment: Develop a guidance note indicating that the trends, uncertainties etc, should include consideration of social and environmental factors.Phrasing as is potentially adequate, especially if the changes above are adopted, but enforcement is the key. Thus a guidance note appears appropriate.V.C.3.aNEW: Details regarding the companys procedures for making appointments to the board, including membership of the appointment committee and summary terms of reference. Any policies regarding the balance of non-executives on the board, their independence and the role of the chairman and chief executive unless covered under V.C.4Strengthening corporate governance disclosure and making it less reliant on national corporate governance codes.V.D Employees.Provide either the number of employees at the end of the period or the average for the period for each of the past three financial years (and changes in such numbers, if material) and, if possible and material, a breakdown of persons employed by main category of activity and geographic location. Also, where material, disclose any significant change in the number of employees, and information regarding the relationship between management and labour unions. If the company employs a significant number of temporary employees, include disclosure of the number of temporary employees on an average during the most recent financial year. Include disclosure of policies and practice in human capital development. Include information on employee training and development including financial investment committed. If appropriate discuss how such policies contribute to the business or create competitive advantage through attracting and retaining staff and improving motivation and productivity. Include disclosure of policies, procedures and outcomes, including any legal action, regarding equal opportunities among the workforce. If appropriate, identify any contribution from this diversity. Disclose policies, practices and significant outcomes regarding occupational health and safety, including any occupational fatalities, major work related incidents or prosecutions in the last three years.Improvements in this section have been loosely based on the King Report on Corporate Governance in South Africa, and also on the French Disclosure standards in Decree N 2002-221 of February 20th, 2002. At present the discussion of employees seems a little lopsided disclosure of numbers but not of their value or other aspects. The additions are intended to rectify this.V.D.1 V.D.2.Reference to section V.B wrong (should be section V.A?). These sections should be V.E.1 and V.E.2? Add (in V.D/E.2): Disclose no of shares held by employees (other than directors ) if available.Inclusion of employee share ownership important and relevant.VII.KLegal and arbitration Proceedings Provide information on any legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the company is aware), including those relating to bankruptcy, receivership or similar proceedings and those involving any third party, which may have, or have had in the recent past (covering at least the previous 12 months), significant effects on the company and/or group's financial position or profitability. This should include ALL governmental (including government agencies and local governments) proceedings including those pending or known to be contemplated, regardless of extent.Make clear that with government proceedings, financial significance is not an issue. Government cases in areas such as environment or equal opportunities can open the door to far greater liabilities, as well as being an indicator of management quality and risk. D: Other Annexes Annex D: Property Company Building Block. Additional DisclosureADD: The Company should disclose risks associated with rent control programs, fuel or energy requirements or regulations, and other social or environmental factors, including regulations actual or pending, that could affect development, construction, letting or sale.Loosely based on SEC Securities Act Industry Guides: Real Estate Partnerships. Annex E: Mineral Company Building Block Additional DisclosureADD [for all mineral companies]: Describe the companys policy and procedures for addressing: indigenous peoples rights, including land ownership; human rights, including security aspects; corruption; environmental impact, including biodiversity. Disclose any areas of specific dispute or contention. Disclose total payments in each of the last three years to the government and public authorities (taxes, royalties, license fees etc.) of each country in which the company has operations.For mineral companies these are important areas and full disclosure is justified on financial grounds alone. The last item reflects the publish what you pay campaign Annex H: Scientific Research Based Company Building Block Additional DisclosureADD: Any information that might be relevant regarding the social or environmental acceptability of the companys research or products.The history of GM foods shows that consideration of the broader acceptability of GM would have been highly relevant. Response to the Consultation on CESR advice on Level 2 Implementing Measures for the Prospectus Directive. 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