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Consultation launched on protecting investors rights
HM Treasury is launching a consultation today on extending the statutory regime on liability for fraudulent misstatement by issuers of securities. This consultation responds to last year's review by Professor Paul Davies Q.C. of the statutory regime, which recommended that the scope of the system should be extended to provide greater security for both investors and issuers.
In his review Professor Davies recommended that the regime should be extended to include:
* more issuers (the extended regime will include issuers with securities admitted to trading on UK multilateral trading facilities, such as AIM and the PLUS-quoted market, and UK issuers with securities admitted to trading on other EEA markets);
* a wider range of ad hoc and periodic disclosures made by issuers to markets;
* losses arising from sales (as well as purchases) of securities;
* losses arising from a dishonest delay in disclosure.
By clarifying rights and obligations, an extended statutory regime will improve the quality of corporate disclosure and reduce the risks facing investors and issuers.
Economic Secretary to the Treasury, Kitty Ussher MP, said:
"There is a strong appetite from both issuers and investors to see progress in this area.
"Through extensive consultation and analysis, Professor Davies has developed a set of proposals to extend the statutory liability regime. These will improve the incentives to issuers for prompt and accurate disclosure, while providing both issuers and investors with greater clarity as to the scope of their liability.
"These changes will improve the efficiency and competitiveness of the UK's capital markets"
Notes for Editors
1. In 2006, a new section 90A of the Financial Services and Markets Act 2000 (FSMA) established a statutory civil liability regime for misstatements to the market by issuers of securities admitted to trading on regulated markets, under which issuers would be liable for fraudulent misstatements in those periodic disclosures to the market required under the Transparency Directive (2004/109/EC). This clarified the previously uncertain common law regime.
2. The scope of the statutory regime was restricted to the area in which statutory provision was required by the Transparency Directive because of the differences of opinion among stakeholders with regard to the impact of any further extension. However, anticipating the benefits of expansion, the Government was granted in section 90B of FSMA, powers to extend the scope of the regime by regulation.
3. In response to stakeholder concerns about the consistency of the new statutory liability regime and whether common law rights of shareholders were at risk, Professor Paul Davies of the London School of Economics was asked to advise on potential changes to ensure that the regime was comprehensive and soundly based. He reported in June 2007 and the Government now proposes to implement proposals that substantially follow his recommendations.
4. During his review, Professor Davies consulted extensively with stakeholders. There was a broad consensus among both issuers and investors that extending the statutory regime was desirable.
5. Following Professor Davies' recommendations, the following extensions are proposed to the scope of the statutory regime:
* from the current scope of issuers with securities admitted to trading on regulated markets (such as the Main Market of the London Stock Exchange) to include issuers with securities admitted to trading on UK multilateral trading facilities (MTFs, such as AIM and the PLUS-quoted market);
* to issuers with securities admitted to trading on an EEA regulated market or MTF (provided they have a registered office in the UK or the UK is their home state under the Transparency Directive);
* to a broad range of ad hoc and periodic disclosures to markets (at present the regime is restricted to periodic disclosures required under the Transparency Directive). This is to be achieved by extending the regime to information disclosed by issuers by means of a recognised information service. A recognised information service would be defined as any service used to publish regulated information under the Transparency or Market Abuse Directives or information required to be published under the rules of an MTF. The person claiming damages would not have to show that the relevant information was obtained from the recognised information service;
* to permit sellers of securities to recover losses incurred through reliance on fraudulent misstatements (at present only buyers are permitted to recover);
* to permit recovery for losses resulting from dishonest delay of a disclosure. An issuer would be liable where the delay is a dishonest act and is for the purpose of enabling a gain to be made or to cause loss to another or expose another to a risk of loss.
6. This consultation will close on 9 October 2008.
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