As the EU market abuse regime will be governed by the Market Abuse Regulation ("MAR") from July 2016, changes to current UK law and the FCA Handbook are necessary to ensure they are consistent with MAR. In November, the Financial Conduct Authority ("FCA") published its long awaited policy proposals in relation to the implementation in the UK of MAR. Fundamental changes will be made to the FCA Handbook, in particular:
- replacing Chapters 1 to 3 of the Disclosure and Transparency Rules ("DTRs") with guidance on, and signposts to, the relevant provisions of MAR and renaming this section "Disclosure Guidance"; and
- replacing the Model Code in Annex 1 of Listing Rule 9 with guidance for firms to use when developing their processes to allow PDMRs to apply for clearance to deal.
The FCA's policy proposals, when read with the European Securities and Markets Authority's Final Report on the Draft Technical Standards on MAR (the "Draft Technical Standards") published on 28 September 2015, provide a much clearer picture of the obligations which will affect listed companies from 3 July 2016 in relation to inside information, the maintenance of insider lists and both the approval for and notification of dealings by persons discharging managerial responsibility ("PDMRs").
In light of this increased clarity on the requirements, listed companies can now start to review their existing policies and procedures to ensure that:
- they have addressed the new obligation to inform the FCA when a decision is made to delay the disclosure of inside information and the possibility that the FCA may request a written explanation of the decision;
- their insider lists comply with the new content requirements detailed in the Draft Technical Standards;
- their share dealing policies are reviewed and updated to reflect MAR and the new FCA guidance (in particular, the fact that the Model Code will be replaced by FCA guidance);
- their PDMRs and persons closely associated with them are aware of the revised requirements in relation to dealings and the obligations to notify the listed company and the FCA; and
- they are aware of the new requirements in respect of market soundings.
Status of the Disclosure and Transparency Rules
From 3 July 2016, MAR will have direct effect in the UK and will govern the civil market abuse framework formerly established by the EU Market Abuse Directive.
For listed companies, the principal implication is that Chapters 1 to 3 of the DTRs will no longer contain the legal requirements relating to market abuse which, moving forwards, will be set out in MAR and its implementing measures. The FCA is proposing that the Disclosure Rules will instead provide guidance on, and act as a signpost to, the relevant provision of MAR and will no longer take the form of binding rules. As a result, the Disclosure Rules in the DTRs will be renamed the Disclosure Guidance. Accordingly, listed companies will need to ensure they are familiar with MAR and the related implementing measures, as well as the FCA's Disclosure Guidance.
Disclosure of inside information
The familiar obligation on listed companies to publicly disclose inside information as soon as possible is retained in MAR, together with the possibility of delaying disclosure where:
- immediate disclosure is likely to prejudice the legitimate interests of the issuer;
- delay of disclosure is not likely to mislead the public; and
- the issuer is able to ensure the confidentiality of that information.
However, under MAR, such a delay will require that the issuer (i) makes a written notification informing the FCA of the existence of the delay and (ii) provides a written explanation to the FCA of the decision to delay disclosure. The FCA is proposing that an explanation will not be required in every instance and that it should be given only if requested. It will, nevertheless, be necessary to make a notification of the existence of the delay in every instance. The Draft Technical Standards provide for this notification to be made immediately after the delayed inside information has been publicly disclosed.
The Draft Technical Standards require listed companies to have in place a minimum level of organisation and a process to conduct a real time assessment of whether information is inside information, whether its disclosure needs to be delayed and for how long. Listed companies are also expected to undertake continuous assessment to ensure the conditions for delaying disclosure remain fulfilled. The Draft Technical Standards also envisage that there will be person(s) identified within the issuer with responsibility for taking decisions relating to inside information. Listed companies may therefore wish to consider forming a separate disclosure committee with responsibility for issues relating to the identification and disclosure of inside information.
It is worth noting that:
- ESMA is required to produce guidelines which will establish a non-exhaustive list of the legitimate interests of issuer and of situations in which delay of disclosure of inside information is likely to mislead the public.This is expected in the summer of 2016; and
- on 20 November 2016, the FCA published a consultation on modifications to the DTRs in relation to the delay of disclosure of inside information. The FCA is proposing to amend DTR 2.5.5 to clarify that issuers may have a legitimate reason to delay the disclosure of inside information in circumstances other than the non-exhaustive list of examples currently in DTR 2.5.3.
Although MAR retains the concept of an "insider list", the format is now prescribed and, despite concerns regarding compliance with data protection provisions, must include information such as each insider's work direct line and mobile telephone numbers, function and reasons for being an insider, and personal address and home and mobile telephone numbers. MAR also requires the insider list to differentiate between "deal specific" and "permanent" insiders. Insider lists are required to be maintained in electronic form and kept up to date at all times. Listed companies will need to review their policies regarding insider lists, and the form of the list, to ensure they meet the new requirements.
MAR introduces new rules to cover soundings to gauge investor interest in offerings of securities and in connection with takeovers and mergers. It is important to note that where a listed company is involved in market soundings (rather than being undertaken solely by the financial adviser), it will have direct obligations, including written record keeping requirements.
Code of Market Conduct
The FCA intends to preserve the content of the Code of Market Conduct as far as legally permitted, in order to help the industry understand the FCA's views and expectations about market abuse. However, there will no longer be a legal requirement for a formal code and this Chapter of the Handbook will simply be referred to as MAR 1 going forwards.
Share dealing policy and the Model Code
MAR introduces new rules to govern share dealing by PDMRs and persons closely associated with them. MAR does not envisage a clearance procedure for dealings and the rules just rely on a blanket ban on dealings prior to results announcements. The FCA considers that the existing Model Code is partially incompatible with the MAR provisions but is aware that market participants are keen to maintain the concept of the Model Code as far as possible. The FCA is therefore proposing to replace the Model Code with guidance for listed companies to use when developing their processes to allow PDMRs to apply for clearance to deal and we would recommend that maintaining a form of clearance system is best practice.
It is worth noting that MAR changes the definition of a close period in the following respects:
- in relation to annual results, the close period will be the 30 days before announcement of the full annual report (regardless of when and whether preliminary results are published);
- in relation to half yearly reports, MAR only restricts dealings in the 30 days before announcement; and
- the prohibition on dealings before publication of quarterly reports has been removed,
although, in each case, listed companies should still be aware that there should be no dealings if there is any inside information in relation to the company.
Notification of share dealings
MAR includes a notification requirement for PDMRs and persons closely associated with them. However, the MAR regime has some significant differences to the current DTR3 regime, including:
- the notification obligation applies to a larger range of financial instruments and now includes instruments traded on multi-lateral trading facilities, such as AIM, and derivatives linked to the shares or debt instruments of the issuer;
- the introduction of a de minimis threshold for notification of transactions of Euro 5,000 per calendar year. It is worth noting that only subsequent transactions need be notified once the Euro 5,000 threshold has been reached and not all transactions;
- the time limit for the notification of dealings by the PDMR to the issuer and the FCA is reduced from 4 to 3 business days from the date of the transaction. The issuer is also under an obligation to notify the FCA of notifications made to it within 3 business days of the transaction. This has potential to cause difficulties if PDMRs do not issue notifications to the issuer until the last minute of the deadline as the issuer may not then be able to comply with its corresponding obligations. As a result, listed companies may wish to consider incorporating a shorter period for the notification of transactions to the issuer into their internal share dealing policy; and
- there is now a standard template for notificationto the FCA, the entirety of which will be publicly disclosed.The template will allow for the multiple transactions to be included on one form, provided the 3 business day deadline is met.
The deadline for responses to the FCA consultation is 4 February 2016 and the FCA expects to publish its final Handbook in a Policy Statement to be issued in Spring 2016.
ESMA has sent the Draft Technical Standards to the European Commission, which has three months to decide whether to endorse. Following endorsement by the Commission, the Council of the EU and the European Parliament have a period in which they can raise any objections.
Whilst MAR retains many of the concepts familiar to listed companies, the detailed provisions expose a number of changes both to form and substance. Listed companies will need to address these changes now in order to ensure their relevant policies and procedures are updated and appropriately communicated before MAR comes into force on 3 July 2016.