The last two weeks of October saw ESMA publish its definitive Guidelines in relation to market sounding recipients and additional Questions and Answers on the Market Abuse Regulation (MAR).
Market Sounding Recipients Guidelines
Although the bulk of the prescriptive provisions in Article 11 and the Level II Regulations fall on the person making the market sounding (disclosing market participant or DMP), the person receiving the market sounding (market sounding recipient or MSR) ), is required to assess for itself whether it is in possession of inside information as a result of the market sounding and when it ceases to be in possession of inside information.
Article 11(11) MAR mandated ESMA to issue Guidelines to MSRs regarding:
- the factors MSRs are to take into account when information is disclosed as part of market sounding in order to assess whether it amounts to inside information
- the steps MSRs are to take if inside information has been disclosed in order to comply with the MAR prohibitions on insider dealing (Article 8) and unlawful disclosure (Article 10)
- the records MSRs are to maintain in order to demonstrate they have complied with Articles 8 and 10.
The Guidelines were first published on 20 October 2016 and are unchanged from those set out in ESMA’s Final Report of 13 July 2016. “Following a linguistic issue in the Polish translation”, they were republished in all 22 languages of the EU on 10 November which moves the application date to 10 January 2017. They state that “competent authorities and financial market participants must make every effort to comply with [ESMA’s] guidelines and recommendations”.
The Guidelines are set out under headings as follows:
1. Internal procedures and staff training
The MSR should establish implement and maintain internal procedures to:
- ensure that where the MSR designates a specific person or contact point to receive market soundings, this information is made available to the DMP
- ensure that information received in the course of a market sounding is internally communicated only through predetermined reporting channels and on a need-to-know basis
- ensure that the individual(s), function or body entrusted to assess whether the MSR is in possession of inside information as a result of the market sounding are clearly identified and properly trained to do so
- manage and control the flow of inside information arising from the market sounding within the MSR and its staff.
2. Communicating the wish not to receive market soundings
After being addressed by a DMP, the MSR should notify the DMP whether they wish not to receive future market soundings in relation to either all potential transactions or particular types.
3. MSR’s assessment as to whether they are in possession of inside information as a result of the market sounding and as to when they cease to be in possession
MSRs should independently assess whether they are in possession of inside information as a result of the market sounding, taking into consideration the DMP’s own assessment and all the information available to the person within the MSR whose role is to conduct that assessment, including information obtained from other sources. However, in conducting that assessment, he or she is not required to access information behind any information barrier within the MSR. MSRs should make an independent assessment on the same basis as to whether they are still in possession of inside information after being notified by the DMP that the information disclosed is no longer inside information.
4. Assessment of related financial instruments
Where the MSR has assessed that they are in possession of inside information as a result of market sounding, in order to comply with Article 8 of MAR, the MSR should identify all the issuers and financial instruments to which they believe the inside information relates.
5. Written minutes or notes
Where the meeting or telephone conversation is unrecorded, the DMP is required to draw up written minutes or notes and the MSR should, within 5 working days after receipt of them, sign them, where they agree upon their content or provide the DMP with their own version of the minutes or notes duly signed where they do not agree on the content. [Note that every meeting or telephone conversation in a market sounding (and not just the initial one) must be either recorded or the subject of written minutes or notes.]
6. Record keeping
MSRs should keep records in a durable medium that ensures accessibility and readability for a period at least 5 years of:
- the internal procedures (1 above);
- the notifications (2above);
- the assessments referred to in 3 above and the reasons therefor;
- the assessment of related instruments (4 above); and
- the persons working for them under a contract of employment or otherwise performing tasks through which they have access to the information communicated in the course of the market soundings, listed in a chronological order for each market sounding.
Q&A on investment recommendations and information recommending or suggesting an investment strategy
ESMA issued updated Q&A on 26 October 2016.
The purpose of the Q&A is both to ensure that the supervisory activities and actions of competent authorities are converging along the lines of the answers and to help issuers, investors and other market participants by providing clarity on the content of the market abuse rules, rather than creating an extra layer of requirements.
The Q&A contain a new section 3 under the heading “investment recommendation and information recommending or suggesting an investment strategy” with four Q&A:
Do communications made orally over electronic means such as telephone calls and “chat” functions, or communications labelled e.g. “morning notes” or “sales notes” constitute an “investment recommendation” under MAR?
ESMA’s answer requires an assessment to be made based on the substance of the communication, irrespective of its name or label or the format through which it is delivered, so that whether a specific oral or electronic communication may be considered an investment recommendation must be established on a case-by-case basis. Where a standardised communication, including oral or electronic, is structured and pre-planned for distribution channels and implicitly or explicitly suggests an investment strategy in relation to a financial instrument or issuer, it should be regarded as “investment recommendation”.
Can communications that do not refer to either one or several financial instruments or issuers be considered investment recommendations under MAR?
ESMA’s answer is that a communication that does not refer to either a financial instrument or an issuer should generally not be considered an investment recommendation, but the assessment must be conducted on a case-by-case basis. A communication not referring to a financial instrument or issuer would be considered an investment recommendation where it contains information assessed as allowing a reasonable investor to deduce that the communication is implicitly recommending specific financial instruments or issuers provided that the other criteria of the definition of “investment recommendation” in MAR are met. “For example an opinion on a specific sector that is composed of a very limited number of issuers may be considered an investment recommendation regarding those issuers”.
Would an investment firm which produces an investment recommendation be considered to fall within the scope of Article 3(1)(34)(i) of MAR even though the production of such recommendation is not its main business?
ESMA's answer is that any information that comprises direct or indirect investment proposals in respect of a financial instrument or an issuer will be considered as information recommending or suggesting an investment strategy regardless of whether or not the production of investment recommendations is the main business of the investment firm.
Does material intended for distribution channels or for the public concerning one or several financial instruments that contain statements indicating that the concerned financial instruments are “undervalued”, “fairly valued” or “overvalued” fall within the definition of “investment recommendation” under MAR?
ESMA says that such material is considered as information implicitly recommending or suggesting an investment strategy insofar as it contains a valuation statement as to the price of a concerned financial instrument.