Financial markets and securities regulation in the European Union and the United States are converging in an increasing number of areas, from the repression of market manipulation to the provision of stricter requirements for market gatekeepers, such as auditing firms and credit rating agencies. The reasons are clear: EU and U.S. lawmakers want to protect investors and ensure the correct functioning of the financial markets. Accordingly, in both jurisdictions, issuers must disclose material corporate information because timely and comprehensive disclosure of this information leads to more accurate prices and greater market efficiency.
However, the extent and subject matter required of issuers’ disclosure vary considerably on either side of the Atlantic. In a forthcoming book chapter, we compare the regulatory frameworks on the disclosure of material corporate information in the EU and the United States to show the degree of such divergence.
In the EU, the Market Abuse Regulation (Regulation (EU) no. 596/2014) requires issuers to disclose “as soon as possible” any non-public information directly concerning the issuer or its financial instruments, which, if it were made public, would be likely to have a significant price effect (so-called “inside information,” which also includes steps in a protracted process if all the elements of the definition are met). This requirement is generally considered a “continuous” disclosure obligation, since issuers must disclose inside information to the public as soon as it arises without waiting for the deadlines for the periodic disclosure of other company information, such as the issuer’s financial statements and accounts.
The responsibility for identifying which corporate information qualifies as inside information and must be disclosed lies entirely with the issuer. This duty has important implications in the market abuse regime, since the notion of inside information, broadened to also encompass information that indirectly concerns the issuer or its securities, serves as the basis for application of the insider trading ban as well. The continuous disclosure obligation thus has a fundamental prophylactic nature against insider trading. By requiring public disclosure of inside information, it also limits the possibility of abusing or misusing it through insider trading conduct.[1]
By contrast, in the United States “there is no general duty to disclose all material information.”[2] While the listing rules of the main U.S. stock exchanges take some steps in this direction, the disclosure of corporate information is still mostly periodic or triggered by specific events. Alongside the periodic disclosure of annual and quarterly reports, issuers must only disclose certain events as they occur, such as developments in business and operations (including, for instance, the entry into material agreements), changes in control, and other specific corporate governance and management changes. The disclosure of these events must be satisfied, within four business days from their occurrence, by filing Form 8-K, also known as the “current report.”
Form 8-K may also be used to meet the disclosure requirements of Regulation Fair Disclosure (Regulation FD). Like rules requiring continuous disclosure, Regulation FD mandates issuers to publicly disclose any material information that was selectively disclosed to certain recipients, including brokers, dealers, investment companies, and advisers. However, the similarities to Europe’s continuous disclosure regime are limited. First, Regulation FD mandates the disclosure of information that might have otherwise not been required to be disclosed (or that might have been required to be disclosed at a later stage) absent the selective disclosure event. Second, Regulation FD allows a grace period for disclosing the information. The public disclosure must be simultaneous with the selective disclosure, if the latter was intentional, or in the case of accidental selective disclosure, it must occur by the beginning of the next day of trading or within the next 24 hours, whichever is later.[3] In the United States, the obligation to disclose certain material corporate information is not strictly linked to the goal of preventing the unlawful exploitation of private, material information, and U.S. insider trading doctrine has developed separately from the disclosure obligations.
Disclosure obligations hence differ in the European Union and the United States in at least two ways: (i) the subject matter of the disclosure and (ii) the timing of the disclosure. To be sure, closer analysis shows that these differences are smaller than they may seem. For instance, the concept of price sensitivity, employed in the EU to identify what qualifies as inside information, substantially corresponds to that of materiality generally used by U.S. courts and the SEC.[4] In fact, in either case, reference is made to information that a reasonable investor would have considered relevant to an investment decision. Moreover, SEC Rule 10b-5, as applied by U.S. courts, might give rise to specific disclosure duties that, at least according to some commentators, might in practice come close to a continuous disclosure regime.[5]
Nevertheless, while in the EU the relevant corporate information must be identified by the issuer, in the United States, the supervisory authority generally determines what constitutes material information. Significantly, the SEC has established in great detail which information should be disclosed through Form 8-K, specifying only in limited instances that the disclosure of information must be made if it is “material” in the specific case.
A recent example of this difference is the measures adopted during the Covid-19 pandemic. EU authorities did not clarify what information issuers had to disclose concerning the effects of the pandemic on their businesses because the concept of inside information was considered broad enough to cover the pandemic context. In the United States, though, the SEC issued specific rule-based guidelines on the subject.
In our book chapter, we find that Europe’s regulatory approach, which focuses on transparency, entrusts issuers with identifying which corporate information must be disclosed to satisfy the goal of market efficiency. Europe’s continuous disclosure regime hence requires issuers to have a robust compliance structure to keep track of internal information, in order to assess whether it qualifies as inside information and how to handle all related disclosure decisions.
Many issuers – and especially small- and mid-cap companies to which the European market abuse rules may still apply – might not be able to afford such efforts. It is thus not surprising that the European Commission recently proposed, within the Listing Act Package, to amend the Market Abuse Regulation to narrow its broad continuous disclosure obligation,[6] considering that this requirement might discourage access to capital markets. It remains to be seen whether this proposal will become law.
ENDNOTES
[1] See e.g. Jennifer Payne, Disclosure of Inside Information, in Transparency of Stock Corporations in Europe: Rationales, Limitations and Perspectives 89, 90, 102, 107 (Vassilios Tountopoulos & Rüdiger Veil eds., 2019).
[2] Stephen J. Choi & A.C. Pritchard, Securities Regulation 50 (5th ed. 2019).
[3] On the subject, see Chiara Mosca, Director-Shareholder Dialogues Behind the Scenes: Searching for a Balance Between Freedom of Expression and Market Fairness, 15 Eur. Company & Fin. L. Rev. 805, 816 (2018).
[4] See e.g. Marco Ventoruzzo & Chiara Picciau, Article 7: Inside information, in Market Abuse Regulation: Commentary and Annotated Guide 259, 283-84 (Marco Ventoruzzo & Sebastian Mock eds., 2d ed. 2022).
[5] See e.g. Dale A. Oesterle, The Inexorable March toward a Continuous Disclosure Requirement for Publicly Traded Corporations: “Are We There Yet?”, 20 Cardozo L. Rev. 135, 143 (1998).
[6] Proposal for a Regulation of the European Parliament and of the Council amending Regulations (EU) 2017/1129, (EU) No 596/2014 and (EU) No 600/2014 to make public capital markets in the Union more attractive for companies and to facilitate access to capital for small and medium-sized enterprises, COM(2022) 762 final (Dec. 7, 2022)
This post comes to us from Chiara Mosca, Consob Commissioner and associate professor of business law at Bocconi University, and Chiara Picciau, assistant professor of business law at the University of Brescia. It is based on their forthcoming book chapter, “Inside Information and Issuer Disclosure Obligations: The Long Way to Convergence between the European Union and the United States,” available here.