Home

Internal

Deutsch|English

AROUND 50 COUNTRIES – OVER 5,800 COLLEAGUES – 1 FIRM |

Worldwide

Pre-Close Calls: In the focus of supervisory authorities – a market practice with risks

published on 28 January 2025 | reading time approx. 4 minutes

Institutional investors and banks of listed companies are demanding more detailed and early information about the company to improve risk management and revenue optimization. Therefore, the market practice of so-called pre-close calls between issuers and investors or analysts has become common before publishing the interim or year-end financial reports. Nevertheless, this market practice has recently been increasingly investigated by supervisory authorities as in pre-close calls inside information pursuant to art. 10 MAR (Market Abuse Regulation) is unlawful disclosed from time to time. In the US, a comparable market practice has already been severely restricted in 2000 by the introduction of the Fair Disclosure Regulation which shall prevent potential information advantages for individual participants in the capital market.

The European Securities and Markets Authority (ESMA) has also recently become active. The ESMA published in May 2024 a statement containing good practices in relation to pre-close calls.

As the year-end financial reports of listed companies are going to be published in the first quarter of 2025, the pre-close call season is starting. In this article we will generally explain the meaning of pre-close calls and illustrate the main risks of such a market practice.

What are Pre-Close Calls

According to the definition of ESMA pre-close calls are communication sessions between issuers and analysts or a group of analysts who generate research, forecasts, and recommendations related to the issuer's financial instruments.

Such non-public discussions between investor relations representatives of listed companies and financial analysts take generally place before the publication of the financial reports (interim and year-end) and typically before the 30-day closed period pursuant to art. 19 MAR.

Subject of pre-close calls may be already public such as key financial figures and significant developments in the reporting period. However, pre-close calls are not intended to communicate new information about the company, but to explain the connection between external parameters and the available results.

Objectives

Issuers have been using pre-close calls for several years to provide analysts with a sound basis for their forecasts and ratings. Thus, the capital market transparency shall be increased, and the quality of analysts' ratings be improved.

Furthermore, pre-close calls can ensure that analysts have realistic expectations regarding the company's financial figures to avoid significant deviations (so-called earnings surprises) of investors and negative market reactions that can result thereof.

Investors and analysts benefit from the practice of pre-close calls by profiting from the increasing market transparency as well as from receiving information on trends and developments of the company that play a role in the results for market participants before publishing specific financial figures.

Potential problem

Pre-close calls are not subject to any specific legal regulations. However, it is a market practice that is particularly determined by inside information pursuant to art. 7 sentence 1 MAR.

The MAR prohibits the disclosure and use of inside information to avoid unjustified information advantages in the capital market. Nevertheless, often information are disclosed in pre-close calls that allow conclusions about developments in the corporate business, in particular through the announcement of previously non-public business figures or forecast adjustments. This may constitute an inside information within the meaning of art. 7 sentence 1 MAR, which must be published as soon as possible. Violations may result in penalties and fines.

Therefore, the market practice of pre-close calls should be scrutinized as it may lead to an unjustified information advantage for individual market participants under the guise of "normal market practice".

In the focus of supervisory authorities

Although pre-close calls have been a common market practice in Germany and the EU for a long time, the issue has recently come to the attention of supervisory authorities.

Media reports have made a link between pre-close calls and the subsequent increased volatility in the share prices of several issuers within the EU shortly after pre-close calls took place, therefore some have raised suspicions about possible unlawful disclosure of inside information. For example, there have been occasions when the share price of publicly listed companies fell for no apparent reason, even though the company had not released any new information. Hence, it was reasonable to assume that certain traders had non-public information.

In January 2024, the price for Adidas shares rose by more than 6% in one day after a pre-close call. By contrast, in April 2024, Institutional Money's analysis showed an unexpected price drop of almost 5% at Continental, even though the company did not publish any announcements and there was no important news from the industry. It turned out that the tire manufacturer had spoken to analysts in a pre-close call.

ESMA took this as an opportunity to issue a warning in its statement on 29 May 2024, with a series of recommendations for listed companies.

The German Federal Financial Supervisory Authority (Bundesanstalt für Fi-nanzdienstleistungsaufsicht - BaFin) is also currently verifying non-public discussions between issuers, analysts and investors to uncover possible information advantages and prevent unlawful practices. For this purpose, some listed companies shall be questioned about their procedures, even without specific indications of misconduct.

USA: Fair-Disclosure Regulation

In the US, which often act as pioneer for Germany and the EU in capital market law, a comparable market practice was widespread until 2000, when companies gave special briefings to certain brokerage firms, resulting in unexpected price fluctuations in the market due to individual information advantages. The US regulatory authority, the Securities and Exchange Commission (SEC), regarded this as an unjustified information advantage for individual market participants and introduced the so-called Fair Disclosure Regulation.

As a result, listed companies are no longer allowed to pass on information to certain investors and to withhold information from others. Rather, they were obliged to publish material information that had not been made public if it was to be passed on selectively to certain persons. The Fair Disclosure Regulation is a supplement to the other insider trading laws in the US and is intended to close regulatory gaps in communication with financial analysts.

Fair-Disclosure-Regulation vs. Market Abuse Regulation

A comparison of the US Fair Disclosure Regulation to the European MAR shows that the threshold to qualify a measure relevant under the Fair Disclosure Regulation is significantly lower than that for inside information under the MAR.

In the US, it is sufficient if information is fundamentally material, i.e. generally suitable to change the assessment of a knowledgeable investor about a listed company. In contrast to inside information pursuant the MAR, however, it is not necessary for the information to have a significant potential effect on the prices of financial instruments.

In the SEC's view, even the confirmation or rejection of analysts' assessments in a conversation with the issuers constitutes a material information that is subject to the Fair Disclosure Regulation.

Violations of the Fair Disclosure Regulation may result in SEC sanctions against issuers and persons acting on their behalf in the form of cease-and-desist orders, but do not give rise to private claims for damages or criminal penalties.

Good practices pursuant to ESMA to avoid insider dealing issues

ESMA has published recommendations (good practice) in its statement on the handling of pre-close calls.

To avoid insider dealing issues the issuers shall:

prior to a pre-close call carry out a through assessment of the information intended to disclose to make sure not disclosing inside information;
publicly disclose the upcoming pre-close calls with sufficient notice, for instance on the issuer’s website, highlight details, date, place, topics to be discussed, and intended participants;
make the material and documents used during pre-close calls simultaneously available on the issuer’s website (e.g. slides and notes, including macroeconomic data shared with participants);
record the pre-close calls and make the recordings available to NCAs upon request;
keep records of the information disclosed during the pre-close calls and publish such records on the issuer’s website, to permit access to those records by the public at large.

Conclusion:

Analysts continue to demand pre-close calls because they are an effective tool for preparing market participants for future figures and reports and minimizing the risk of negative surprises by improving the quality of analyst estimates. However, to benefit from these advantages as an issuer, a thorough legal preparation, evaluation and documentation of the information exchange is required prior to the pre-close calls in order to avoid disclosure of any inside information.

Careful and competent advice on how to deal with this topic enables efficient and profitable participation in capital market communication and prevents the risk of illegal and punishable insider trading practices.