Market disclosure obligations through PDMR forms – some facts

Article #1 by Vincent E Rizzo - Published Monthly

Early this year, the Malta Financial Services Authority (MFSA) issued a circular making reference to the Market Abuse Regulation enacted by the European Parliament and the Technical Standards of the European Securities and Markets Authority (ESMA) which had come into force on 3 July 2016.

Article 19 of the Market Abuse Regulation stipulates that persons discharging managerial responsibilities (PDMR’s), as well as persons closely associated with them, shall notify the issuer and the competent authority (in our case, the MFSA) of every transaction conducted on their own account.

The MFSA circular issued on 5 January 2017 explained that two changes were being made to the procedure that had to be followed until these amendments came into force. Firstly, a notification by a PDMR or a close associate must now be carried out within three working days by completing the form provided by the ESMA Technical Standards rather than the previous Legal Notice form. Secondly, each of the issuers are now obliged to publish the information completed by PDMR’s following a transaction in the relevant issuer’s securities also within three working days from the date of the transaction. The MFSA is also obliged to publish this information. Previously, only the MFSA was requested to make PDMR related transactions public by means of disclosure on its website.

I could safely assume that many local market participants, including small stakeholders, are not, to date, aware of this obligation and its recent amendments and more importantly, appreciative of the information value that this disclosure may provide.

A PDMR is defined as a person within an issuer who is: (i) a member of the administrative, management or supervisory body of that company; or (ii) a senior executive who has regular access to inside information relating directly or indirectly to that company and who has the power to take managerial decisions affecting future developments and business prospects. Moreover, the responsibilities also lie within a person closely associated to a PDMR. This includes (i) a spouse or a partner considered to be equivalent to a spouse in accordance with national law; (ii) a dependent child, in accordance with national law; (iii) a relative who has shared the same household for at least one year on the date of the transaction concerned; or (iv) a legal person, trust or partnership, in which a PDMR or a close associate has any managerial responsibilities and has an economic interest in the listed entity.

Readers will no doubt agree that this rather wide-ranging definition potentially captures a relatively large number of persons associated with respective listed companies and, as a result, it would be sensible, principally in the interest of ensuring accurate disclosure, to suggest that companies listed on the Malta Stock Exchange (irrespective of whether they are bond and/or equity issuers) compile, publish and regularly update its list of all the persons falling with the definition of a PDMR. Furthermore, it would be equally sensible for all companies to ensure, on a continuing basis, that PDMR’s are provided with all necessary information including their responsibilities to disclose if and when such persons transact in the securities in which they are connected.

In a nutshell, the principal obligation on PDMR’s is to disclose any transactions undertaken in securities within which they are classified as discharging managerial responsibilities as long as these transactions (irrespective of whether they constitute acquisitions or disposals of relevant securities) amount to a value of not less than €5,000 in aggregate per year. The disclosure to both the listed company concerned as well as to the MFSA will include the transaction’s details such as date, time, quantity, price, nature (buy or sell) and PDMR relationship. A schedule of such transactions is to be published on the respective company’s website for information purposes.

The regulation prohibits PDMR’s from conducting any transaction in the security concerned during a ‘closed period’. This is defined as the period falling 30 calendar days before the announcement of an interim financial report or a full year financial report which every listed company is obliged to publish in accordance with the relevant listing rules. Previously, this prohibition extended to 60 days. This notwithstanding, the regulation caters for some potentially exceptional circumstances.

The principal aim of this regulation is to ensure timely and accurate disclosure of trades considered to be more sensitive in view of the PDMR’s relationship with the respective listed company. It is assumed that this increased disclosure and resultant transparency constitutes a precautionary measure against potential market abuse, particularly insider dealing, by persons who are closely associated with listed companies and who may transact in the respective company’s listed instruments. Full and proper market transparency even in this regard is most certainly a prerequisite for the maintenance of consistent investor confidence that is, in itself, one of the principal ingredients for a healthy capital market.

But why are these disclosure obligations so relevant one may quite rightly ask? Considering the close connections between PDMR’s and the respective listed companies, purchases or sales of securities in which these persons are connected could possibly provide valuable direction to security prices, most especially if the value of the transaction or transactions is consider to be material. In view of the assumed increased knowledge of PDMR’s of the relevant company and its present circumstances, this disclosure may take on a different meaning. Imagine, for instance, if the Chairman or CEO, who, to date, may not own shares in the relevant company acquires a significant number of shares. Surely, this information is valuable as it indicates that this PDMR views the shares are being attractive at the point of acquisition. Similarly, what could the market conclude if it is notified, for instance, that the CFO of a listed company sells a meaningful number of shares in the relevant company? Whatever the market concludes in each instance is not quite the relevant part here. It is the actual disclosure that is. The market will then judge for itself and the direction of the respective share price may be guided by this relevant disclosure.

In countries such as the UK for example, directors' dealings (as these are referred to) very often attract particular attention by the financial press possibly also as a result of the fact that regulation in the UK stipulates that dealings by directors must also be published via company announcements. This obligation gives these particular transactions added disclosure and relevance and are closely followed.

As stated earlier, as from this year, website of companies whose shares and/or bonds are listed on the MSE have been (or should be) updated to include this information as and when such PDMR deals occur. Similarly, the website of the MFSA site also discloses these deals in a relevant section for this purpose and the latest PDMR deals can be found here: http://www.mfsa.com.mt/pages/pdmr.aspx. Some interesting deals do indeed emerge from this information. It would be interesting to understand why such regulation applicable locally has not also obliged the listed companies from publishing this same information by means of a company announcement similar to the publication via an announcement of director dealings in the UK.

In conclusion, it is worth noting that a PDMR is always prohibited from dealing when in possession of price-sensitive information, i.e. information that has increased potential of influencing a company’s share price when released to the public. Examples of price-sensitive information include news related to possible takeovers, a significant share issue or the adjudication or otherwise of relevant material business deals.

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Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon.

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