Danuta Pajewska, interviews

Danuta Pajewska: Transparency of the capital market is fundamental

Litigation Portal: We hear more and more often of proceedings against companies before the Polish Financial Supervision Authority for violation of requirements concerning confidential information, involving use or unauthorised release of inside information. Why are these issues so important?

Danuta Pajewska: One of the key principles of the capital markets is transparency, and providing investors information about public companies at the same time and with the same content. Transparency is fundamental, and violations are subject to administrative, civil and criminal sanctions. Everyone should be informed about important events within a company at the same time. Clearly not all information is equally important, which is why the category of “confidential information” has been carved out for certain types of information. This concerns events that have a material impact on a company’s share price.

For example, if someone with access to confidential information discloses it to unauthorised persons, who then use the information to buy or sell shares, expecting that the price will soon rise or fall, that will be a violation of law.

The company must adequately protect confidential information from unauthorised access and improper disclosure.

Is it difficult to detect such violations?

Yes, it is a difficult problem for regulators and prosecutors. It is necessary to prove that a person who bought or sold shares actually made use of inside information. It can be hard to link the transaction by an investor to a person with access to confidential information. Sometimes information is passed along from person to person, and only at the end of the chain does someone trade on the information. The Financial Supervision Authority publishes data on its website concerning persons found to have violated confidentiality requirements, which means that these persons are being discovered.

There is the well-known problem that arose last year of firms, including listed companies, that bought currency options to hedge against exchange-rate risks. Many of these firms landed in hot water, and now the Financial Supervision Authority has charged them for failing to notify shareholders that they had invested in such risky securities, and several companies have been fined. Recently there were allegations in the press that confidential information was used in negotiations concerning acquisition of shares in Bank Zachodni WBK. Whether that was really the case or not has yet to be determined.

What information is confidential?

Any information that has or could have a material impact on the price of shares—for example, information about the sale of significant assets, conclusion of a key contract, a major acquisition by the company, a fire at a warehouse, damage to machinery, or production stoppage. The law provides a suggestive list of material information that a company should disclose, with regulations stating the events that are to be published in the form of a current report. But it is not an exhaustive list. In each case it is necessary to consider whether the specific information could affect the share price.

Certainly information about financial results is confidential information. When the company is drawing up its periodic financial reports and sees that there will be a significant profit or loss, this information cannot be released or used until it is announced in accordance with the regulations.

There have been calls to eliminate the legal catalogue of information that a company must announce, and leave each situation to be determined by the company on a case-by-case basis. The list is so detailed that the market is flooded with reports that are not relevant to investors, and truly important information can get lost in the shuffle. If the regulations are revised in that direction, there would be fewer reports issued, but only significant ones.

Wouldn’t that be a change for the better?

Both approaches have their supporters and detractors. For companies debuting on the capital market, it is a convenient reference to have a list in place. It is important to bear in mind that reporting obligations do not apply to private companies. But as soon as a company enters the capital market, it must completely change its approach and disclose information to everyone in order to guarantee fair trading. No one can issue securities to the public without disclosing the whole picture to investors.

What should companies do to protect themselves from liability for violations of this sort?

First and foremost, a public company must bring order to the internal flow of information. Staff must know that they cannot make use of certain information without subjecting the company or themselves to liability. Information about the company should flow in a defined direction, channelled to a single centre where, together with the management board, decisions are made about publication.

The entire finance department must be under particularly strict control, and other staff should not have any access to financial information before it is published.

And if there is a sudden event that has or could have a material impact on the value of the company’s shares, information about the event must be reported immediately, within 24 hours.

Is the company alone liable, or also an investor who uses confidential information?

Penalties will be imposed for a violation by anyone who has access to information and a duty to protect it, as well as anyone who obtained unauthorised access to confidential information and exploited it.