The Market Abuse Regulation (MAR) comes into force on 3 July 2016. It is EU legislation with direct effect, which replaces the Market Abuse Directive (MAD). For AIM and ISDX companies, there will be a new regime altogether since AIM and ISDX securities (together with debt instruments issued by an AIM company or an ISDX company and related derivatives and linked financial instruments) are in scope. The FCA will be responsible for enforcement of MAR and investigation of breaches but cannot give any waivers or derogations. However, as market regulator for AIM companies the London Stock Exchange will also be involved.
MAR prohibits, when in possession of inside information, dealing (or cancelling or amending an order made before possessing the inside information) and recommending or inducing another person to deal; and unlawful disclosure of inside information. It also prohibits market manipulation (which is broadly the subject of the current UK market abuse regime, which it will replace). The existing criminal sanctions for insider dealing under the Criminal Justice Act 1993 remain in place.
As MAR applies directly, the FCA will not copy it out. Instead, companies and their advisers must refer to the text of MAR directly, as well as to the detailed “Level 2 Regulations” that is implementing or delegated regulations made by the European Commission pursuant to MAR. The European Securities & Markets Authority (ESMA) is mandated to give guidance on certain aspects of MAR. The FCA has recast some provisions in its Code of Market Conduct and Disclosure Rules (part of the DTR) as guidance in relation to MAR.
The FCA and the Exchange have, to an extent, signposted the relevant Articles of MAR in their respective Handbook and Rules. The FCA say (in the 50th edition of Market Watch ON 27 April 2016) that “it is the responsibility of firms to ensure that they understand the new requirements and are fully compliant by 3 July 2016” and in PS16/13 (published on 28 April 2016) that they “expect firms to comply with EU MAR and any directly applicable EU Regulation made under EU MAR as of 3 July 2016”. The Stock Exchange also says in AIM Notice No 44 that “existing AIM companies will be expected to update their policies to ensure compliance with the new Rule  by 3 July 2016.”
This note focuses on the key points that impact on listed and quoted companies and their management.
INSIDE INFORMATION, DISCLOSURE (AND DELAYED DISCLOSURE) AND INSIDER LISTS
The definition of “inside information” in Article 7 of MAR is broadly the same as the Financial Services Markets Act 2000 definition. What is different are the requirements that apply both in relation to insider lists (new for AIM and ISDX companies) and prescribed content and procedure both for insider lists and for announcements containing inside information and for record keeping when disclosure is delayed, including a record of the reasons for delayed disclosure.
Up to now, whilst Main Market issuers have, since the implementation of MAD in 2005, been subject to DTR2 in relation to the disclosure and control of inside information, for AIM companies, disclosure requirements were contained exclusively in AIM Rule 11 (general disclosure of price sensitive information). In AIM Notice 44, the Exchange state that they propose to retain Rule 11 whilst amending the related Guidance Note, which will signpost AIM companies’ separate obligation to also comply with Article 17 of MAR (disclosure). However, it is very difficult to envisage any information that would fall to be disclosed under AIM Rule 11 that is not inside information for MAR purposes. If, following responses to the consultation pursuant to AIM Notice 44, the Exchange proceeds with its proposals, it is to be hoped that they will give examples of information that they consider would not be inside information under MAR but would require disclosure under AIM Rule 11.
In any event, identifying inside information is important because of the new and very prescriptive record keeping rules relating to delaying disclosure (Article 17 MAR) and insider lists (Article 18 MAR).
- Review and update policy for identifying and disclosing inside information, having regard to FCA guidance in DTR2.2.
Disclosure and Delaying Disclosure (Article 17(1) and (4))
Article 17(1) MAR requires an issuer to inform the public as soon as possible of inside information which directly concerns that issuer. The Level 2 Regulation prescribes the details that must be included in an Article 17(1) disclosure, which include a statement that it contains inside information.
The issuer must maintain on its website for at least 5 years inside information which it is required to disclose.
Under Article 17(4), delaying disclosure is permitted provided that all three of the following conditions are met:
- immediate disclosure is likely to prejudice the legitimate interests of the issuer
- delay of disclosure is not likely to mislead the public
- the issuer is able to ensure the confidentiality of the information.
The Level 2 Regulation requires a written record of the date the inside information was identified, the times and date(s) on which disclosure was delayed and evidence that the conditions for delaying disclosure have been satisfied (including details of information barriers). The record must be retained for 5 years.
MAR provides that, when announcing inside information following a delay in disclosure, the issuer must inform its competent authority that disclosure was delayed and provide a written explanation of how the conditions were met. Whilst the FCA must be informed of the delay, the FCA has used an option in MAR to require the written explanation only upon request.
In AIM Notice 44, the Exchange states that they “do not expect there to be any significant change to the approach of an AIM company and its nominated adviser when considering an AIM company’s disclosure obligations under the AIM Rules”. This is because the Exchange are retaining AIM Rule 11 for any information that may be price sensitive but is not inside information for the purposes of the MAR. They are also retaining in the Guidance Notes to the AIM Rules for Companies the ability for an AIM company to delay disclosure (provided the disclosure does not constitute inside information) where confidentiality can be assured and there are impending developments or matters in the course of negotiation. This is rather wider than the ESMA draft Guidance on the circumstances in which a “legitimate interest” may exist for the purposes of the MAR as ESMA reject “impending developments” as too generic. The Exchange envisages that there might be circumstances when an issuer has a legitimate interest in delaying disclosure under Article 17 but may nevertheless be required to disclose under AIM Rule 11. It is difficult to see how this can work in practice and we await the outcome of the Exchange’s consultation which closed on 12 May.
- Template for inside information disclosure
- Template for record for delaying disclosure
- Policy and guidance on “legitimate interest”.
INSIDER LISTS (MAR ARTICLE 18)
Since MAD came into force, Main Market issuers have had to keep insider lists of all persons who have access to inside information and who are working for them under a contact of employment or otherwise. The requirement to keep and update an insider list (which must be provided to the FCA upon request) is a new requirement for AIM and ISDX companies and will apply until MiFID II comes into force (1 January 2018). Even then, AIM and ISDX companies will have to be able to provide the FCA, upon request, with an insider list with the details set out in the MAR Level 2 Regulation, which sets out a mandatory template for the insider list, and must be kept in electronic format (at least until MiFID II comes into force).
It is important to link the formal insider list with the definition of inside information and the disclosure requirements. If disclosure is to be delayed, then an insider list must be drawn up at that point. If, however, the information is not yet sufficiently precise to be inside information, as defined in MAR, details of the individuals involved should be kept in a confidential project list but not as an insider list template. It will be important also to ensure that all the company’s advisers do the same and do not draw up a formal insider list in MAR format until a decision has been taken that the information is now inside information and that the issuer has a legitimate interest to delay and the other conditions for delaying disclosure are met.
Advisers may choose to draw up and maintain their own insider list (and are expected to do so because of the level of personal data the template requires), but an issuer must have the right to access it at any time.
Issuers must also take all reasonable steps to ensure that any person on the insider list acknowledges the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information. That acknowledgement must be in writing (except for AIM and ISDX companies when MiFID II comes into force).
Article 18 envisages that a separate insider list is drawn up for each transaction involving inside information, but the Level 2 Regulation permits the creation of a “permanent insiders list”, which should “include only those persons who, due to the nature of their function or position, have access to all inside information within the issuer”. A permanent insider is deemed to have access to all inside information at all times. Any permanent insiders list should accordingly be very small and some companies may decide not to maintain one at all.
Template for insider obligations, sanctions and acknowledgement.
Obtain personal details of individuals so an Insider List template can be populated quickly.
Review and update advisers’ engagement letters.
Review policy on who is to be an insider (the fewer in number the better).
Decide whether to keep a permanent insiders list.
NOTIFICATION OF PDMR DEALINGS (MAR ARTICLE 19)
Persons discharging managerial responsibilities of an issuer (PDMRs) and persons closely associated with them (PCAs) must notify the issuer and the FCA within 3 business days after the relevant transaction in respect of every transaction conducted on their own account relating to the shares or debt instruments of the AIM company or to derivatives or other financial instruments linked to them. The issuer is required to notify the public within 3 business days of the transaction. In practice, issuers are likely to require their PDMRs to notify them within 2 business days and to arrange for notification to the FCA and the market.
Under MAR, only transactions by or on behalf of any individual PDMR and his/her PCAs which in aggregate amount to EUR 5,000 (without netting) are required to be notified, but it is expected that most companies will have a dealing code which requires all transactions to be notified. In PS16/13, the FCA say that issuers may notify all transactions on a voluntary basis regardless of the EUR 5,000 threshold. Notifications must be made in the form prescribed by the Level 2 Regulation; a complex form which PDMRs may need help in completing.
Apart from the template form and the time period, the obligations for PDMRs of Main Market issuers and their PCAs are not materially different under the MAR. However, for AIM company PDMRs, the new regime is different from the current disclosure requirement in respect of directors’ dealings in AIM Rule 17 in the following ways
- “a person discharging managerial responsibilities” is defined in the MAR to include, as well as a director, a senior executive, “who is not a member of the board of directors, who has regular access to inside information relating to directly or indirectly to the issuer and power to take managerial decisions affecting the future developments and business prospects of that entity”
- The MAR definition of “persons closely associated” with a PDMR is different to the definition of “family” for the purposes of AIM Rule 17. It means
- a spouse or a partner considered to be equivalent to a spouse
- a dependent child
- a relative who has shared the same household for at least 1 year on the date the transaction concerned (e.g. a child over 18 or an elderly parent)
- a legal person, trust or partnership, the managerial responsibilities of which are discharged by a PDMR or by a person referred to in (a), (b) or (c) which is directly or indirectly controlled by such a person
- which is set up for the benefit of such a person
- or the economic interests of which are substantially equivalent to those of such a person.
The AIM definition of “deal” will be deleted and the Level 2 Regulation sets out a long, non-exhaustive list of “notifiable transactions” which are broader in scope and include automatic vesting of options and inheritance received.
Issuers are required to notify each PDMR of his or her obligations under Article 19 (notification of dealings and MAR closed periods (see below)). They are also required to draw up a list of all PDMRs and their PCAs, whilst PDMRs themselves are required to notify their PCAs in writing of the PCAs’ obligations under Article 19 and to keep a copy of this notification.
- Check who amongst non-main board directors/executives is currently classified as a PDMR. Do they need to be?
- Template letter to PDMRs
- Template letter for PDMRs to their PCAs
- Template notification form
- Template list of notifiable transactions
- Review procedures manual.
MAR CLOSED PERIODS AND DEALING CODES (MAR ARTICLE 19(11) AND (12))
The MAR imposes a closed period of 30 calendar days before the announcement of an interim financial report or a year-end report during which PDMRs are prohibited from conducting any transactions on their own account or for the account of a third party directly or indirectly relating to the shares or debt instruments of their company or to derivatives or other financial instruments linked to them. This is incompatible with the Model Code, which will be deleted from the Listing Rules with effect from 3 July 2016.
It is not clear whether a preliminary statement of annual results marks the end of a MAR closed period (as it does under the Model Code and AIM Regulation has routinely agreed on a case-by-case basis up to now) or whether a second MAR closed period commences in the period between publication of the preliminary statements and of the full audited annual report and accounts. Pending the issue of guidance from ESMA or the FCA and (for AIM companies a change to the AIM Rules which currently do not permit or require preliminary statements), the MAR closed period will end on publication of the full audited annual report and not the preliminary statement.
Permitted dealings under the MAR during a MAR closed period are much narrower than the Model Code exceptions, being limited broadly to exceptional circumstances of extreme financial hardship, on a case by case basis, and transactions made under an employee share or savings scheme. In addition, both the Model Code and the AIM definition of “deal” exclude from “deal” transactions that are prohibited in a MAR closed period, such as acceptances of a takeover offer.
Under the MAR, it is only during a MAR closed period that PDMRs must seek permission to deal. The Level 2 Regulation requires a written request from the PDMR, which includes evidence why the transaction cannot be granted at a time outside the closed period. It also sets out in further detail which transactions may be permitted.
Because of the general MAR prohibition on insider dealing/unlawful disclosure, it is expected that many companies will continue to impose a voluntary dealing code on PDMRs and require permission to deal in all circumstances. The proposed amendments to the AIM Rules replace existing AIM Rule 21 (with its two month close period) with a requirement to have a dealing policy for directors and applicable employees. “Applicable employees” for AIM Rule 21 purposes means any employee within the AIM company’s group who is likely to be in possession of inside information because of his employment. This is much broader than a PDMR under the MAR (see above). Amended Rule 21 sets out what AIM Regulation says are the minimum provisions they would expect to see in a dealing policy but do not make it clear whether permission to deal should always be required in every circumstance. Nomads will be required to review the policy.
- Ensure PDMRs are aware of the new MAR closed periods and the changes from the Model Code/current dealing code
- Consider adoption of new dealing code
- Review and consider clearance procedures
- Check timing of grants of share options
- Check PDMR participation in share saving schemes, dividend reinvestment plans, trading plans.