The EU Listing Act: Amendments To MiFID II To Boost Investment Research And Improve SME Visibility

Authors: Jon Termonen, Tobias Palmgren, and Jaarle Lehtinen

Following up on our previous blog post covering the key changes to the Prospectus Regulation and the Market Abuse Regulation, included in the so-called “Listing Act” legislative package, this entry summarises the amendments to the Markets in Financial Instruments Directive II (MiFID II), which will be published in the Official Journal of the European Union in the coming weeks and enters into force 20 days thereafter. Member States will have 18 months to transpose the amendments into national legislation. The amendments will affect various stakeholders in the financial sector, ranging from investment firms performing equity research to multilateral trading facility (MTF) operators and issuers of financial instruments. Notably, the amendments include a downwards adjustment of the minimum free float requirement.

A substantial portion of the amendments to MiFID II have been introduced to encourage more investment research, especially on EU-based SMEs, which traditionally have had a lower amount and quality of analyst coverage, a higher probability of losing such coverage, and a limited secondary market liquidity. Additionally, some technical amendments to MiFID II are introduced.

The key elements of the amendments:

• decrease the minimum free float requirement from 25% to 10% (while also allowing Member States to apply alternative ways of measuring whether a sufficient number of shares have been distributed to the public at the time of admission to trading), remove the geographical restrictions of the free float requirement, and remove the requirement for debt securities that mandates loan amounts to be no less than EUR 200,000;
• adjust the current research unbundling rules to allow more flexibility for investment firms to organise payment for execution services and the provision of third-party research, whilst introducing a requirement to notify the investment firm’s clients about whether such payments are made jointly or separately. Under current rules, investment firms are required to either separate brokerage commissions from payments received for providing investment research or to use their own funds to pay for the investment research and to perform quality assessments of any purchased investment research. Since 2021, investment firms have, however, been allowed to bundle payments received for providing execution services and research to SMEs with a market capitalisation not exceeding EUR 1 billion. This market capitalisation threshold is now removed in light of new transparency requirements to ensure investor and client protection;
• introduce the requirement to label issuer-sponsored research. Such materials will also have to be produced in accordance with a specific code of conduct to be developed by ESMA. Issuer-sponsored research not prepared in accordance with the code of conduct will have to be labelled as marketing communication. Additionally, issuers will be able to submit their issuer-sponsored research with the relevant collection body under the European Single Access Point Regulation, to make the research more visible to the public;
• permit issuers whose financial instruments are being traded on an SME growth market to raise objections if their instruments are also to be traded on a different trading venue. The amendment extends issuers’ right of objection from covering trading on other SME growth markets only, to cover trading on all other trading venues. This is to reduce risks associated with fragmented liquidity; and
• repeal Directive 2001/34/EC on the admission of securities to official stock exchange listing and on information to be published on those securities (the “Listing Directive”) to drive market harmonisation at Union level and create a single rulebook. Substantial parts of the Listing Directive have already been replaced by other directives, wherefore it has become largely redundant. Extending the scope of MiFID II ensures that all relevant provisions from the Listing Directive are maintained. Thus, certain provisions and obligations of the Listing Directive (such as provisions relating to free float and market capitalisation) will be included in MiFID II.

Our Capital Markets Team is closely following the impacts of the Listing Act on the capital markets and will gladly discuss any related questions. Hannes Snellman advises issuers, sponsors, financial advisers, and other market participants in connection with all types of capital markets transactions, including IPOs, public tender offers, share issues, securities offerings, private placements, debt instruments, share buy-backs, and other regulatory matters.