The European Union’s Market Abuse Regulation (MAR) came into force on Sunday 3 July 2016. We set out below a summary of the key provisions of MAR and their implications for asset managers.
1. What is MAR?
MAR is an expansion and development of the existing EU market abuse regime and whilst it repeals the 2004 Market Abuse Directive (MAD), much of its content will be familiar in concept. Its aim is to standardise definitions in the market abuse regime across the EU, as well as to broaden the regime's scope in terms of the transactions it covers and offences applicable thereto.
2. What is inside information?
The definition of “inside information” under MAR catches information:
- which is of a precise nature;
- which has not been made public;
- relating directly or indirectly to one or more issuers or to one or more financial instruments; and
- which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.
Information will be “precise” where:
- it indicates circumstances which exist or which may reasonably be expected to come into existence; or
- it indicates an event which has occurred or which may reasonably be expected to occur; and
- it is specific enough to enable a conclusion to be drawn as to the possible effect of those circumstances or that event on the prices of the financial instruments or the related derivative financial instruments.
Information will be “likely to have a significant effect on price” where a reasonable investor would be likely to use it as part of the basis of his or her investment decisions. The concept of a “reasonable investor” is not new in the UK as it is part of the regime under MAD as implemented in the UK. However the import of the term is arguably wider than under MAD, as it is not solely about the impact on prices of the relevant financial instruments but also the weight a reasonable investor is likely to place on the information.
3. What are the offences under MAR?
There are three offences provided for under MAR all of which will be of interest to asset managers.
3.1 Insider dealing
The offence of insider dealing arises where a person possesses inside information and uses that information by acquiring or disposing of, directly or indirectly, financial instruments to which that information relates. The offence under MAR includes recommending or inducing another person to deal as an insider, and applies to any person who possesses inside information:
- and who is a member of the management of an issuer, for example, directors or senior managers;
- and who has a holding in the capital of an issuer;
- and who has access to the inside information as a result of employment, profession or duties, for example, employees and professional advisers; or
- as a result of his involvement in criminal activities.
The offence also applies to any other person who possesses inside information and knows or ought to know that it is inside information.
3.2 Unlawful disclosure of inside information
The offence of unlawful disclosure of inside information arises where a person possesses inside information and discloses that information except in the normal exercise of their employment, profession or duties. The onward disclosure is also an offence where the discloser knew or ought to have known that it was based on inside information.
Market soundings that is to say, normal communications of information to potential counterparties to gauge their interest before a transaction is announced are permitted, subject to the following:
- the party taking the soundings being the issuer of the relevant financial instruments, itself or a third party acting on its behalf;
- on a takeover:
- the information being necessary to enable the recipient to decide whether to tender securities; and
- the willingness to tender being reasonably required for the decision to make the takeover offer,
- the party taking the soundings obtaining recipient consent;
- the party taking the soundings complying with certain record-keeping requirements; and
- a confidentiality undertaking being obtained from the recipient of the sounding.
3.3 Market manipulation
This is a very broadly drawn offence - market manipulation is committed where a person enters into a transaction, places an order to trade or carries out any other behaviour that:
- gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument;
- secures, or is likely to secure, the price of one or several financial instrument,
unless carried out for "legitimate reasons" and in accordance with accepted market practices.
For example, this offence may be committed where a person takes advantage of occasional or regular access to the traditional or electronic media by voicing an opinion about a financial instrument (or indirectly about its issuer) while having previously taken positions on that financial instrument and profiting subsequently from the impact of the opinions voiced on the price of that instrument without having simultaneously disclosed that conflict of interest to the public in a proper and effective way.
The Annexes to MAR provides guidance on identifying behaviours which will be deemed to be market manipulation.
There is also an extension under MAR of the market manipulation offence to include attempted market manipulation and the prohibition of abuse behaviour regarding benchmarks.
4. Are there any further "safe harbours"?
MAR sets out a concept of “legitimate behaviour” which applies to the offences insider dealing and improper disclosure. "Legitimate behaviour" in this context may include:
- situations where a market participant has made appropriate internal arrangements (such as the use of internal information barriers) to avoid the use of inside information;
- acting as a market maker; or
- carrying out legal or regulatory obligations incurred before coming into possession of inside information.
In addition, in the context of a takeover, there is a “safe harbour” for inside information obtained and used solely for the purpose of that takeover provided the information is made public prior to shareholder acceptance.
In addition to these "safe harbours" the concept of market soundings as set out above will also apply in respect of the offence of market manipulation.
5. What do asset managers need to know in relation to disclosure of dealings?
There remains under MAR the principle of "Persons Discharging Managerial Responsibilities" (PDMRs) and "Persons Closely Associated" (PCAs) who are obliged to disclose certain transactions in financial instruments to both the issuer and the FCA. MAR sets out the circumstances in which the disclosures must be made. Asset managers will wish to ensure that their client on-boarding processes identify new clients who may qualify as PDMRs or PCAs in order that they are able to assist such clients in managing their exposure to the PDMR/PCA regime.
It should be noted that there are exemptions available in relation to notification requirements in respect of holdings by collective investment schemes, notably where the financial instrument is a unit or share in a collective investment scheme whose exposure to the relevant issuer's shares or debt instruments does not exceed 20% of the assets held by the collective investment scheme.
6. Insider lists
Issuers and persons acting on their behalf must continue to prepare and maintain insider lists. Whilst this requirement is not new form of these lists and the process for their compilation should be reviewed following MAR's implementation. Insider lists must include all persons who have access to insider information and who are working for them under a contract of employment, or otherwise performing tasks through which they have access to inside information, such as advisers, accountants or credit rating agencies.
At a minimum the list must include:
- the identity of any person having access to inside information;
- the reason for including that person in the insider list;
- the date and time at which that person obtained access to inside information;
- the date on which the insider list was drawn up.
The list must be updated in the following circumstances:
- a change in the reason for including a person already on the insider list;
- a new person has access to inside information and needs, therefore, to be added to the insider list; or
- person ceases to have access to inside information.
The insider list must be provided to the competent authority as soon as possible upon request.
Any person acting on behalf of an issuer (or the issuer themselves) must take all reasonable steps to ensure that any person on the insider list acknowledges in writing the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information. Note that the issuer retains liability for third parties and must always retain a right of access to the insider list.
Most asset managers will no doubt already have put in place the necessary procedures and processes to comply with the market abuse regime, but the coming into force of MAR, and to make changes in compliance with MAR where necessary is a good opportunity to review them and ensure that they are working effectively.