The Market Abuse Regulation – where we are now
The Market Abuse Regulation (EU) No 596/2014 ("MAR") enters into force on 3 July 2016 and issuers are updating their internal guidelines and processes to conform to the new regime. MAR constitutes directly applicable law in EU Member States, the purpose of which, together with the Directive on Criminal Sanctions for Market Abuse (2014/57/EU, "CS MAD"), is to safeguard market integrity and protect investors by replacing the existing Market Abuse Directive (2003/6/EC).
MAR will result in changes to the obligation of issuers to disclose inside information, the reporting of transactions by persons discharging managerial responsibilities and persons closely associated with them, and to the offences of insider dealing and unlawful disclosure of inside information. In addition, changes will also be made to the requirements and standards relating to insider lists, market manipulation, market soundings, buy-back programs, stabilization measures and whistleblowing.
In addition to being directly applicable law, MAR will also have an impact on national legislation. For instance, overlapping provisions of the Finnish Securities Market Act (746/2012, as amended) (the "SMA") will essentially be repealed, and amendments will be made to several other Acts regulating the financial instruments market. Further, CS MAD complements MAR by requiring all Member States to provide for harmonized criminal laws in respect of insider dealing, unlawful disclosure of inside information and market manipulation, leading also to more stringent sanctions for breaches of insider rules.
MAR represents a new regime with novel solutions to the regulation of insider matters, and many aspects of MAR need to be carefully considered not only by issuers, but also by regulators. We discuss below selected issues that have arisen during the preparation process for the MAR regime.
Certain considerations for issuers
Management of inside information and internal procedures for delaying disclosure. If they have not done so already, issuers should review their internal guidelines to ensure that they have appropriate procedures in place to comply with the new regime. In particular, the delay of disclosure and management of inside information require introduction of new internal procedures, the appointment of responsible individuals and efficient management of insider lists and delayed disclosure databases.
In general, issuers should have internal procedures in place (i) to assess whether certain information constitutes inside information, and (ii) if so, make the decision to immediately disclose the information or, if the requirements are met, delay the disclosure of the information, and (iii) if the disclosure is delayed, to simultaneously establish a project-specific section in the issuer's insider list. All of these steps need to be properly documented. It is recommended that issuers refer to the model form prepared by the Advisory Board of Finnish Listed Companies for recording the decisions to delay disclosure (Available at http://cgfinland.fi/listayhtioiden-neuvottelukunta/mar-tyoryhman-ohjeistus-listayhtioille/).
Permanent insiders in the issuer's insider list. ESMA's approach is that permanent insiders are deemed to have knowledge of all inside information from the moment it originates at the issuer. However, in reality, there may be sensitive situations where only a few individuals, e.g. the Chairman of the Board and the Managing Director, have knowledge of certain inside information. It may thus not be appropriate to define individuals as permanent insiders at the outset, and, in practice, it may not be that cumbersome to list the individuals separately in each of the project-specific sections of the insider list. We understand that many issuers have elected not to include a permanent section in their insider lists and we recommend this practice.
Collecting information on insiders in advance. MAR increases the extent of information required on each insider to be recorded in the issuer's insider list, and also requires a written acknowledgement by the insiders of their obligations arising from the entry in the insider list and related sanctions. Issuers can prepare for these new requirements by collecting in advance the requisite information and acknowledgments of related obligations e.g. from members of the Board and senior management and others typically entered in the issuer's insider lists.
Definition of managers' closely associated persons for transaction reporting. MAR provides that both persons discharging managerial responsibilities at an issuer ("Managers") as well as persons closely associated with them ("Related Parties") must notify the issuer and the Finnish Financial Supervisory Authority ("FIN-FSA") of the transactions conducted by them on the issuer's financial instruments. If they have not done so already, issuers should inform their Managers about this reporting obligation and provide sufficient instructions for the Managers on the submission of the transaction notifications in practice, as well as on the Managers' obligation to inform their Related Parties of this obligation (Issuers can refer to the model notification forms prepared by the Advisory Board of Finnish Listed Companies available at http://cgfinland.fi/listayhtioiden-neuvottelukunta/mar-tyoryhman-ohjeistus-listayhtioille/). Issuers should also keep a list of the Managers and their Related Parties and for this purpose, ask their Managers to provide the issuer with sufficient identification information for their Related Parties (e.g. name, date of birth/Business Identification Code or similar, and contact details for potential questions on the notifications).
The scope of the financial instruments and transactions to be notified by the Managers and their Related Parties is broad and encompasses virtually any acquisitions, disposals or transfers (including e.g. pledging, lending, and transferring by gift or inheritance) of any equity, debt or derivative instruments. Issuers should appoint responsible individuals and have sufficient technical solutions and resources available to publish the transaction notifications received from the Managers and their Related Parties within the three business day deadline imposed in MAR.
Pursuant to MAR, a Related Party is defined as:
- a spouse, or a partner considered to be equivalent to a spouse in accordance with national law;
- a dependent child, in accordance with national law;
- a relative who has shared the same household for at least one year on the date of the transaction concerned; or
- a legal person, trust or partnership, the managerial responsibilities of which are discharged by a person discharging managerial responsibilities or by any of the persons referred to above, 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.
Controlled corporations as Related Parties. Due to differences in the various language versions of MAR, the question as to when a corporation should be defined as a Related Party under d) above is still awaiting confirmation by the European Parliament. The main question is whether it is sufficient that a Manager or their Related Party holds a managerial position at a corporation, or whether a relationship of control or an ownership or economic interest is also required. In Finland, the FIN-FSA has confirmed that until this issue has been clarified, it will not apply a broad definition of controlled corporations. In practice, this means that for now the FIN-FSA does not require transaction reporting based on a mere managerial position at a corporation. However, issuers and corporations falling under the broad definition of controlled corporations should carefully follow the development of this matter and be prepared to quickly implement necessary procedures for transaction reporting should the broad definition prevail.
On a related note, the FIN-FSA has also indicated that it would be inclined to interpret managerial positions narrowly. In respect of private corporations that are not under an obligation to define the group of Managers under MAR, managerial positions would likely only cover the Board members, Supervisory Board members and the Managing Director, as well as their deputies. This approach could be applied analogically also to associations, foundations and other types of entities. In respect of managerial positions at another issuer subject to MAR, issuers should be able to rely on the definition of the Managers at the other issuer.
Issuers should also prepare for the situation where they themselves are classified as Related Parties in relation to other issuer(s) and thus are subject to the transaction reporting obligation for the financial instruments of such other issuer(s), especially if the European Parliament confirms the broad definition of controlled corporations discussed above.
Choice of law provisions with respect to Related Parties. With respect to spouses and children, the national law of the country in which the issuer is registered will determine whether a person is to be considered a partner equivalent to a spouse or a dependent child. Since such individuals may be foreign citizens or resident outside of Finland, specific choice of law provisions of national law will apply and may refer the issue to be determined in accordance with the law of another country (e.g. the country in which a registered partnership was registered). With respect to cohabitation partners (Finnish: avopuoliso), the absence of specific choice of law provisions in national law may result in substantive Finnish law determining whether a cohabitation partner resident outside of Finland is to be considered a Related Party.
Closed period and profit warnings. MAR provides that the Managers must comply with a closed period of 30 days prior to the publication of the issuer's financial reports. The closed period prohibits virtually all transactions by the Managers in the issuer's financial instruments on the Managers' own account or for the account of a third party. The insider guidelines produced by Nasdaq Helsinki recommend that issuers impose similar trading restrictions on those involved in the preparation and disclosure of the issuer's financial reports, unless the issuer treats the preparation of financial reports as insider projects (which is not required as such). We understand that many issuers have opted to recommend that those involved in financial reporting also be required to comply with the 30 day closed period, rather than establish a project-specific insider list for the preparation of financial reports. However, should any inside information emerge in connection with the preparation of financial reports, issuers shall either immediately publish a profit warning as before, or, if the inside information does not amount to a profit warning and the requirements are met, issuers can decide to delay the disclosure as discussed above.
Whistle-blowing. Issuers must have in place appropriate procedures for their employees and other individuals in their service to report infringements of insider rules and regulations to the issuer. These procedures may be based on the issuer's existing whistle-blowing procedures, but should be reflected in the issuer's updated insider guidelines.
Market soundings. Following the entry into force of MAR, the way in which market soundings are conducted in connection with capital market and other transactions will be strictly regulated. Any information disclosed in connection with a market sounding must be duly recorded, and e.g. a specific consent must be obtained from the recipient if inside information is disclosed. Issuers must ensure that a certain standard set of information is provided to each recipient in connection with market soundings, and also maintain detailed records of all the market soundings they have conducted. It is recommended that issuers prepare their own market sounding checklists and manuals to ensure they comply with the new requirements.
Transition of existing insider projects. All new insider projects within issuers will be subject to MAR after it enters into force on 3 July 2016. However, it is proposed that insider lists relating to existing insider projects continue to be regulated by the current regime until the relevant insider projects are terminated. This means that the existing, pending insider lists do not need to be updated to satisfy the MAR requirements.