CFA Institute Welcomes ESMA’s Proposals under the Prospectus Regulation

Despite all the interest in Brexit, the European Commission is still in the business of producing rules to manage securities markets. Evidence for this can be found in last week’s announcement by the European Securities and Markets Authority (ESMA) of its final technical advice on risk factor presentation under the Prospectus Regulation.

Recall that the Prospectus Regulation was one of the first elements of the Capital Markets Union (CMU) initiative to reach the legislative stage. It aims to improve the ability of European capital markets to support the wider European economy by making it easier to access public capital through improved and harmonised rules and regulations governing prospectuses. Last year, CFA Institute released its proposed template for a European prospectus summary in the report Designing a European Summary Prospectus Using Behavioural Insights.

Part of the focus in designing the template was to streamline the presentation of risk factors to avoid “boilerplate” disclosure. Last week, ESMA issued its guidelines on how to achieve these focused risk factors. The ways in which ESMA proposes to improve the relevance of risk factor disclosures are:

• Risk factors should have a clear material impact on the offering and be amended or excluded if this materiality is not obvious.
• There should be a direct causal link between the risk factor and the performance of the issuer, the guarantor or the securities being offered. Again, if this link is not obvious the risk factor should be amended or excluded. Further, any impact should be quantified, if possible, and described qualitatively if numbers cannot be estimated.
• If a risk factor is included in the disclosure document, mitigating language should not be used in order to avoid influencing an investor’s judgment of the risk factor.
• Risk factors should be categorised according to the nature of the risks.

CFA Institute welcomes these proposals to make risk factor disclosures more relevant to investors under the Prospectus Regulation. As shown in our template in Designing a European Summary Prospectus Using Behavioural Insights, which provides an example prospectus summary for a fictional company,it is possible to present a meaningful and comprehensible risk factor summary on a single document page. Other techniques from behavioural insight — such as colour coding and page layout—are also discussed as ways to improve these disclosure documents for investors. While ESMA does not go into presentation details such as these in its guidelines, other bodies, such as IOSCO have picked up on these themes and have cited our work in their own disclosure research. We hope companies can use our report as inspiration to develop innovative approaches to the presentation of their securities offerings.

Image Credit: ©Christine Phillips