BaFin substantiates administrative practice with regard to ad hoc publication of key financial figures pursuant to Art. 17 para. 1 MMVO
Issuers of securities must comply with extensive transparency obligations. Besides regular disclosure duties, they are also subject to capital market law requirements for financial reporting pursuant to Sections 114-118 WpHG (German Securities Trading Act) and the requirements of the respective stock exchange regulations. In particular, the capital market provisions are intended to ensure that investors are receiving timely information on developments in the issuer’s business throughout the year, at specified times.
Irrespective of the financial calendar for financial reporting and for the purpose of transparency, non-public information which concerns the issuer and has a considerable potential to influence the share price (so-called insider information, cf. Art. 7(1a) Market Abuse Regulation – MMVO), has to be published isolated from other information at the earliest possible, i.e. without delay (so-called ad hoc publicity, cf. Art. 17(1) MMVO). The assessment, whether inside information are subject to publication, is carried out considering specific circumstances on a case-by-case basis and often causes difficulties in practice.
The Federal Financial Supervisory Authority (BaFin) has recently specified an administrative practice on publication of inside information, in particular with regard to the question of when key financial figures are to be published ad hoc.
Key financial figures as insider information subject to disclosure requirements
A change in the financial figures (both historical and forecast), can in principle be suitable insider information within the meaning of the MMVO. According to MMVO, for the assessment of insider information, an existence of considerable price sensitivity is essential. Key financial figures are generally accepted as having a considerable price influencing potential. The BaFin explicitly states in its Issuer Guideline (Emittentenleitfaden, chapter IV, 4th Edition 2013), the material deviations, in the results of the annual financial statements or interim reports compared with the prior results or market forecasts in general, as price relevant. This requires the publication of the specific key financial figures relevant to the share price. Publication of a mere summary of the annual report or the financial statements is not sufficient.
Further, the price-sensitive financial figures should be published immediately after determination, irrespective of weekdays or stock exchange trading hours. Generally, insider information is generated before preparing or approval of the annual financial statement or before finalizing the management report.
Administrative practice of BaFin
According to BaFin, a financial figure is considered price-sensitive, if it significantly deviates from the relevant benchmark. For this purpose initially, issuer's own published forecast is used as the benchmark. If the issuer has not published such a forecast, the respective market expectation shall be taken into account. This is determined by BaFin, by means of the so-called Consensus Estimates, i.e. by using the mean value of the relevant analyst estimates. In case, a comprehensible market expectation is also lacking, BaFin uses the previous year's figures for its assessment.
In this context, it is noteworthy that in practice, BaFin pursues a formalized approach in the assessment of price sensitivity. In any case, a material deviation from benchmark requires ad hoc disclosure. A materiality exists, if the deviation meets the quantitative materiality threshold, the extent of which, however, may vary in specific individual cases. Qualitative aspects, despite exceeding the materiality threshold in specific individual cases, are of subordinated importance or even disregarded for assessment of price sensitivity.
The aforementioned approach also applies to the interim financial figures, which might lead to significant impacts in practice. Given the case the issuer only publishes annual forecasts, according to BaFin insider information exists if the interim financial figures differ from market expectation or from comparable prior period figures (if there is no market expectation) even though the annual forecast is still expected to be achieved.
Apart from this, insider information with regard to key financial figures may also exist, even if a material deviation from the benchmark cannot be ascertained. In such case, determining price sensitivity is based on qualitative factors and requires judgement, especially when the financial figures provides a signal such as a turnaround or end of a growth phase.
Sanctions in case of omission or incorrect publication of insider information
An omission to publish or incorrect publication (i.e. incorrect, incomplete, not being published in the prescribed manner or on prescribed time) of insider information, may result severe punishments. Potential claims for damages (cf. §§ 97, 98 WpHG) and a punishment as an infringement of the law, with a fine up to one million euros (cf. § 120(15) and (18) WpHG) can be charged. In addition, a criminal liability for market manipulation may also be applicable (cf. §§ 119(1) in conjunction with 120(2)(3) WpHG).
Effects on the issuer’s internal processes
A purely quantitative materiality threshold as a trigger for ad hoc disclosures, which not only applies to annual but interim financial results, presents issuers multi-dimensional challenges. Accounting, controlling, investor relations, IT as well as the legal department must interact more closely, than ever before, to identify high reliable information in a timely manner and ensure accurate and timely communication. In particular, the requirement for "immediate" publication of price-sensitive financial key figures regularly poses challenges for corporate groups, as information is usually reflected within the group with a time lag (ultimo plus X days). This is particularly the case for those groups that do not record their data directly in the group ERP but upload/ submit their data to the group reporting system via a reporting package. This time lag can be significant with regard to ad hoc disclosure requirements, especially if those groups constitute significant subunits.
As a first step, we recommend adapting existing ad hoc reporting processes or implementing them if no regular processes exist. In this context, it is necessary to define responsibilities, validation rules, escalation mechanisms as well as information flows (who will be informed, when and with which information). Early warning systems/processes should be established (e.g. linking incoming orders and sales) in order to promptly anticipate potentially significant deviations of price influencing financial figures. These can also be embedded in risk detection or risk management systems. In conjunction with more agile communication channels, apart from the standardized monthly reporting, bottom-up information to the top management might become faster and more reliable. Individual units have to be differentiated on the basis of materiality for the group as a whole in order to ensure efficiency of the target process.
The IT and system landscape are key factors in meeting these requirements. "Refining processes” along the data flow, such as (manual) data enrichments, calculations, processing as well as media gaps increase the risk of errors and loss of information. An integrated and harmonized IT and system landscape may enhance the reliability of data immensely.
The "new" administrative practice of BaFin aligns with the strategy of the global standard-setting board (IASB). The current harmonization and digitization trends in reporting (such as iXBRL and ESEF) set the foundation for future reporting. Although no direct link exists, the requirements for the ad-hoc publication are also in line with the currently prevailing trend and represent a further step towards a real time reporting.