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21 June 2013

EBF comments on ESMA Draft RTS on specific situations that require the publication of a supplement to the prospectus

EBF believes that the mandate to develop RTS should be exercised restrictively and in the interests of investor protection.

The systematic and very formal approach ESMA takes in deciding that a supplement has  to be produced is not in line with Article 16 Prospectus Directive. The decision on the requirement to publish a supplement can only be based on a case-by-case analysis by the issuer of the significance of new development.

Not every annual financial statement is per se “significant” or “material” and requires a  supplement. Furthermore, if new financial information is in line with market expectations and the statements made in the prospectus it is neither “significant” nor “material” as it does not change the investor’s assessment. The same applies to interim profit estimates. Instead, a case-by-case analysis of these developments is required.

A requirement to produce a supplement for any judgement or concluding event, even if subject to appeal, in governmental, legal or arbitration proceedings already disclosed in the prospectus could result in undesirable disinformation effects for the investors.

The draft standards are intended to specify “situations where a significant new factor, material  mistake or inaccuracy relating to the information included in the prospectus requires a  supplement to the prospectus to be published". This means that not all changes should trigger the publication of a supplement, but only those so significant or material that information about them needs to be made available to investors in the interests of investor protection.

The objective of harmonisation can only be achieved if it is sufficiently clear precisely which cases will require a supplement to be published. EBF agrees with ESMA that, for the reasons outlined in the consultation paper (par 21), it would not be appropriate to set rigid thresholds.

But EBF is critical of the fact that issuers are to be denied the possibility of making any decisions themselves. ESMA’s systematic approach to determining whether there is a “significant new factor, material mistake or inaccuracy” which requires a supplement does not correspond to Article 16 of the Prospectus Directive. Article 16 of the Prospectus Directive says that a supplement needs to be prepared in the event of a significant or material deviation from the originally approved version. It should be borne in mind that Article 5 of the Directive does not only require prospectuses to contain significant or material information. Instead, they should contain all information which, depending on the characteristics of the issuer and the securities publicly offered or admitted to trading on a regulated market, are necessary to enable investors to make a well-founded assessment of the assets and liabilities, financial position, profits and losses, prospects of the issuer and any guarantor, and of any rights associated with the securities. The intention is to consolidate all the relevant information needed to make an investment decision in a single document. Market practitioners have developed a very broad understanding of what information needs to be included in a  prospectus, especially with the liability regime in mind.

ESMA’s highly inflexible proposals, which allow no room for discretion by issuers, would result  in investors being confronted with many more supplements offering little in the way of informational value. “Formal” supplements of this kind are of no help to investors, since it is left to them to assess how important the supplemental information may be. The danger, as EBF sees it, is that investors will be inundated and overwhelmed by such information. Though the increased number of supplements would certainly serve to promote harmonisation in the European Union, sight would be lost of the real purpose of prospectuses and their regulation.

Investor protection will not be increased through a proliferation of supplements which simply risk making the prospectus more confusing. The tried and tested balance struck by European lawmakers between more information and sufficient clarity should not be undermined by an excessively long list of situations requiring the production of a supplement. With this in mind, EBF believes the mandate to develop RTS should be exercised restrictively and in the interests of investor protection.

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