The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010 (the 2010 Regulations) apply to information first published on or after 1 October 2010.
Before 1 October, statutory liability was imposed on main market-listed companies for fraudulent mis-statements contained within results statements.
The purpose of the 2010 Regulations is to extend the regime for the liability of issuers so that it:
- applies to the Alternative Investment Market (AIM), PLUS-quoted and other markets in the UK;
- applies to all announcements made by such companies;
- creates a new offence of a dishonest delay by the issuer in publishing information; and
- obliges issuers to pay compensation to third parties who have suffered loss as a result of mis-statements or dishonest omissions in information published by the issuer.
Timely, comprehensive and complete reporting by companies is a crucial element of promoting the efficiency of capital markets. The aim of the 2010 Regulations is to incentivise issuers to make prompt and accurate disclosures by clarifying the position with regard to issuer liability in damages for inaccurate statements.
Ultimately, the goal is to improve investor confidence in reporting, thereby lessening the risk to investors, which will reduce the cost of capital to issuers.
The 2010 Regulations apply to information published by the issuer by a recognised information service (RIS). The current regime only applies to certain information (ie annual and half-yearly reports, interim management statements, and preliminary results statements) announced by issuers whose securities are listed or traded on a regulated market (eg the main market of the London Stock Exchange). From 1 October 2010, the regime will apply to all information announced through an RIS by issuers whose securities are listed or traded on any securities market in the UK, including AIM and PLUS-quoted markets.
The test for proving liability is one of fraud by management, ie if a person discharging managerial responsibilities:
- knew the statement to be untrue or misleading, or was reckless about whether it was untrue or misleading; or
- knew the omission to be a dishonest concealment of a material fact.
A person’s conduct is regarded as dishonest only if:
- it is regarded as dishonest by persons who regularly trade on the securities market in question; and
- the person was aware (or must be taken to have been aware) that it was so regarded.
Although most issuers are already vigilant when preparing market announcements, the 2010 Regulations are likely to emphasise the importance of verifying the accuracy and timing of any announcement. However, it remains to be seen whether the stringent test of fraud by management can be proved or whether it will prevent many successful claims being made against issuers.