EUROPEAN Union securities regulators last week put out a paper on creating a central disclosure system — but with so many vested interests to placate it seems implausible that investors will soon have a single gateway to EU securities filings.
Rather than create a central database that all issuers in Europe must submit their disclosures to – a model many financial analysts and institutional investors prefer -– the Committee of European Securities Regulators (CESR) wants to maintain the current system of 29 separate databases but introduce common standards to make them searchable.
Progress towards developing an integrated European securities filings network has been slow. Currently, a website has been established where investors can view a list of all companies and then link to the homepage of the national OAM that has jurisdiction over the company. The CESR accepts that this approach is rudimentary and has poor usability.
Now the Paris-based CESR says its national members favor making it possible to search all of the national securities filings repositories, called OAMs (Officially Appointed Mechanisms), through a central access point — something like a financial Google.
But it admits that this approach would be more difficult and more expensive than simply building a new pan-European database. It also says that while it prefers building a search engine, it isn’t clear how it will do this because the committee is “still analyzing different technical solutions.”
All 27 EU states have set up their own regulatory databases, but the CESR notes that some are “still operated on basis of an interim solution.” While all provide free access to raw information, some earn revenues by charging end users for feeds and other services.
A central EDGAR-style database for Europe presents a threat to national OAMs because it could compete with them by selling its own, more complete feed.
Too quick to reject company websites
It’s interesting to note that in its deliberations, the CESR has largely ignored the recommendations of a December 2009 consultant’s study the EU commissioned to probe market participants’ views on the implementation of the Transparency Directive.
That study surveyed investors and other stakeholders and found that only 5% said they used national regulatory databases. Meanwhile, 68% of those surveyed said they used company websites as a first source of information when searching for information about a specific company (see chart below).
Consequently, the consultants Mazars put forward three recommendations, two of which involved relying on company websites for disclosures. The report’s executive summary (PDF 650 KB) says possible scenarios include relying exclusively on issuers’ websites but regulating them with harmonized standards, or creating a central access point under the CESR with direct links to the speciﬁc section of companies’ websites where regulated information would be stored. The last option was to improve the functioning, interconnection and visibility of the national databases.
However, the CESR has rejected the use of company websites in their disclosure system out of hand, saying:
CESR considers that an OAM has added value when compared against issuer’s websites. OAMs provide comprehensive and free of charge coverage on historical information disclosed by issuers. The information filed at an OAM cannot be changed afterwards. In addition, especially in case of certain types of debt issuers, such as Special Purpose Vehicles and corporate subsidiaries, the issuer may not have its own website, in which case the OAM provides easier access to regulated information published by such an issuer.
This seems rather myopic. First, company websites are also free and can easily provide any historical information the regulators mandate. Second, to say that companies cannot be trusted not to change their disclosures after making them public assumes all are dishonest. And third, the rejection is technically unimaginative.
For instance, it would be a simple matter for companies to be required to publish information on their websites in a prescribed format that is made available to anyone, including the national regulator and the CESR, on a real-time basis via a feed or API. It would then be impossible for companies to alter the information once it is distributed in real-time from their websites.
As for the issue of some issuers not having websites, this could and should be made mandatory for all issuers. In 2010, not having a website tied to a securities issue is akin to them not providing any information to the market, especially if only 5% of investors ever use regulatory databases.
Of course, if company websites were used, the national regulators would no longer have a monopoly on regulated information. They wouldn’t be able to charge the same fees to investors and financial information intermediaries to access it.
On the positive side, however, investors and intermediaries would get their feeds faster from companies directly. New competitors would spring up to aggregate and add value to these disclosures. Innovation would flourish and reliable information would be free and ubiquitous.
However, the CESR is not interested in hearing anything more on this topic as the paper does not ask any questions about it.
A ray of hope in XBRL
One ray of hope is that the CESR is going to investigate using eXtensible Business Reporting Language (XBRL) for company financial reports. They expect to issue a consultation paper on XBRL in 2011.
However, they are still only talking about filing to OAMs and thinking of a 5-year transitional period to introduce a mandatory requirement. Consequently, investors will have to wait some time still for the first lot of formal XBRL filings. And it will take several years after that for there to be enough historical XBRL data to make the format truly useful.
So where’s the ray of hope, you ask. Well, the CESR notes that should XBRL be mandated – as it most likely will unless Europe wants to be an island cut off from the rest of the financial world – “most OAMs would need to adjust their systems” and this “would naturally impose development costs for them.” The paper also notes that it would be easier to implement XBRL if there was a single OAM for Europe.
In other words, we might well see a central EDGAR-style repository for Europe after all, or perhaps European regulators, realizing the genie is out of the bottle, will look to a distributed model that uses company websites instead.