The FCA has responsibility for monitoring the accuracy and timeliness of public announcements made by public companies with shares admitted to listing or trading (on the Official List, AIM and the Specialist Fund Segment). It has the power to investigate both companies and individuals and to impose penalties on them for breaches of the Market Abuse Regulation (“MAR”) and to prosecute where it considers criminal offences have been committed. In a speech given on 6 February 2020, Mark Steward, the FCA’s director of Enforcement and Market Oversight, made it clear that it is now armed with more robust and sophisticated systems to identify potential non-compliance with inside information disclosure obligations by listed companies as well as its determination to investigate and take action, where appropriate, including where it appears that false and misleading statements may have contributed to the destruction of shareholder value.
The increased availability of data and advanced analytical systems capable of efficiently crunching that data have meant that the FCA is able to more proficiently detect abnormal share price movements by comparing data before and after the publication of any major, unexpected or market-moving announcements. If the FCA does detect abnormal activity, it is likely the FCA’s Market Integrity Unit will write to the issuer enquiring as to whether the contents and/or timing of the announcement may have contributed to the share price movements.
An enquiry letter, where the company is unable to satisfy the FCA’s concerns, may lead to a formal investigation being opened which may cover both civil and criminal offences and, if proved, action being taken against the listed company and/or its directors, including the possibility of restitution to investors who have suffered loss as a result of the improper content or timing of any announcement. Issuers should be prepared to respond clearly to such enquiries to demonstrate and evidence how they were satisfied that their announcements were accurate, that any inside information was announced as soon as possible, or where it was delayed that they had undertaken appropriate assessments to determine they had legitimate reasons to do so.
The FCA’s increased detective powers
The FCA monitors compliance by issuers with their obligation to disclose inside information accurately and promptly and, if necessary, will investigate and, where appropriate, take enforcement action against an issuer which has not complied with those obligations. The FCA’s aim, broadly, is to ensure the maintenance of an orderly market for listed securities by:
- reducing the risk that shareholders and investors sustain economic loss due to the issuer making omissions or misstatements of information in their disclosures to the market that could be material to investment decisions; and
- restricting the ability of insiders privy to such information from taking advantage of delays to public disclosures and benefiting themselves by trading on inside information ahead of the market.
The FCA has been implementing strategies designed to increase the amount and detail of data it receives (including MiFID II transaction reports; the FTSE 300 order book; and suspicious transaction & order reports), and using systems and processes that are capable of analysing all of this data efficiently and accurately to detect abnormalities in market integrity.
The FCA also employs two key metrics in the detection of abnormal share price movements in the market: (1) the market cleanliness metric, which is focused mainly on identifying abnormal share price movements in the lead up to takeover announcements; and (2) the abnormal trading volume (or ATV) ratio, which analyses movements in the trading volumes of securities that are the subject of unexpected price sensitive announcements in the absence of any other potentially price sensitive announcements in the market, with a 5% variation qualifying as significant.
FCA investigation and enforcement
Recent examples of the FCA’s investigative and enforcement powers in action include:
- an investigation into the timing and content of trading updates made by Carillion, which made various announcements to the market during a period when its share price plunged by 70% and its chief executive resigned; and
- an investigation into a trading update made by Tesco which had overstated its expected profits and was found to have committed market abuse by having given a false or misleading impression of the value of its securities. Tesco accepted responsibility for this and was ordered to pay restitution to those investors who have suffered loss as a result. This was on top of a fine imposed by the SFO as part of a deferred prosecution agreement.
FCA contact with an issuer following the release of inside information is becoming increasingly common. The FCA has recently warned that “would-be abusers” should be aware that the team’s increased investigative powers and its appetite for investigation have materially increased the risk of any wrongdoing being uncovered. We are also seeing increasing numbers of FCA preliminary enquiries over share price movements following company announcements.
It is probable that a significant proportion of those instances of abnormal share price activity identified by the FCA using these investigative techniques will not have resulted from breaches of inside information disclosure obligations under MAR or an attempt to disrupt or mislead the market or benefit insiders. The determination of what is inside information at any given time, and the circumstances in which it must or should be disclosed to the market is highly fact-specific and rarely clear-cut, and depends on the issuer (with the assistance of appropriate professional advice and particularly its sponsor, nomad and/or corporate broker, as applicable) performing an on-going assessment of the information that it holds, including, in particular, the assessment as to whether or not the issuer has a “legitimate interest” in delaying public disclosure of such information.
Inside Information and Delayed Disclosure
Companies with securities admitted to trading on public markets in the UK are subject to the disclosure requirements of the MAR Article 17 which requires an issuer to inform the public as soon as possible of inside information that directly concerns that issuer, ensuring that this information is made public in a way that enables the public to access it quickly and make a complete, correct and timely assessment of that information.
For these purposes, “inside information” is information of a precise nature relating directly or indirectly to an issuer or its financial instruments, which has not yet been made public, but if it were made public would likely have a significant effect on the prices of the issuer’s financial instruments or related derivative products.
The only exception to this obligation, where the need to disclose inside information may be delayed by an issuer, is in circumstances where: (1) immediate disclosure is likely to prejudice the “legitimate interests” of the issuer; (2) delay of disclosure is not likely to mislead the public; and (3) the issuer is able to maintain the confidentiality of the inside information. The FCA makes clear in the guidance given in the Disclosure Guidance and Transparency Rules that whether or not an issuer has a legitimate interest which would be prejudiced by the disclosure of certain inside information is for the issuer to assess in the first instance.
To assist an issuer in making this assessment, the European Markets and Securities Authority published guidelines (the “ESMA Guidelines”) which include non-exhaustive examples of situations that it considers are likely to constitute a “legitimate interest”. These include where a delay in disclosure of inside information is necessary to avoid jeopardising the outcome of negotiations the issuer is conducting in relation to proposed M&A or reorganisation activity; or the outcome of negotiations with creditors where the issuer is in financial difficulty and is trying to agree terms to safeguard its financial recovery.
The ESMA Guidelines also provide examples of situations in which ESMA considers that delayed disclosure would be likely to mislead the public, including where the information subject to the delayed disclosure:
- is materially different from a public announcement previously made by the issuer on the matter to which the inside information relates; or
- relates to the fact that the issuer’s financial objectives are not likely to be met if such objectives have been publicly announced previously; or
- is in contrast with market expectations based on announcements or other communications the issuer has previously released to the market.
Implications of delaying disclosure
Where an issuer delays the announcement of inside information, it will need to comply with certain additional record keeping and reporting obligations under MAR.
The company must ensure it keeps a record of the decision to delay the disclosure of inside information, which will potentially be disclosable to the FCA if it so requests. Such records should include:
- dates and times when the inside information first existed within the company, when the decision to delay disclosure was made and when the company is likely to disclose that information;
- identities of persons within the company responsible for deciding on the start and likely end of the delay, the ongoing monitoring of the conditions for the delay, the date when the information subject to the delay will be published, and the provision of the requested information about the delay to the FCA; and
- evidence of initial fulfilment of the conditions to delayed disclosure and any change during the delay period including details of any internal information barriers put in place to prevent access to inside information by persons other those who will require it in the course of their duties, and details of any arrangements put in place in case there is a leak.
Notification and Explanation
Once information that is subject to any delayed disclosure is finally disclosed to the public, the issuer must immediately notify the FCA of the fact that disclosure was delayed, and submit certain details, including the issuer’s identity; the identity and contact details of the person making the notification, details of the information that was subject to delayed disclosure; the date and time that the decision was made to delay such disclosure; and the identity of any persons responsible for making the decision to delay disclosure. That notification can be submitted by way of an online form which can be accessed here. The issuer must also be prepared to provide a written explanation of how the conditions permitting such delay were satisfied, in case the FCA requests this.
The need for case by case assessments
Under MAR, where an announcement contains inside information, reference to that fact must be included in the announcement itself. To ensure full compliance with their obligations, it is important that issuers ensure they are making a case by case assessment in respect of each announcement they release. Taking a blanket approach to these assessments by simply including reference to the inclusion of inside information out of an abundance of caution is not appropriate.
In the early days of MAR implementation, this was a particular concern in the context of issuers releasing announcements in respect of their financial results - and the FCA has issued specific guidance by way of a technical note setting out their views on the assessment of inside information and the application of the legitimate interests exception in the context of the preparation of issuers’ periodic financial reports.
In addition to MAR, AIM issuers must ensure they continue to comply with the disclosure rules set out in rules 11 to 17 of the AIM Rules for Companies (the “AIM Rules”), ensuring that they have in place, pursuant to rule 31, effective procedures and controls designed to ensure the confidentiality of inside information to minimise the risk of a leak. While the guidance notes to the AIM Rules notes that compliance with MAR does not mean that an AIM company will have satisfied its obligations under the AIM Rules and vice versa, in most instances compliance with the MAR obligation should also satisfy the AIM Rules requirements. If in doubt, issuers should seek appropriate advice.
What should Companies be doing to protect themselves
Issuers may want to consider taking time at the end of each board meeting to review, discuss and assess whether any inside information exists and has been dealt with appropriately. The determination of what constitutes inside information and the issuer’s “legitimate interests” in delaying public disclosure of inside information can be complex and specific advice should be sought from an issuer’s professional advisers and records kept to evidence this advice. In all cases, issuers should:
- ensure that they assess on an ongoing basis whether there is inside information and have appropriate governance in place to evidence this consideration;
- keep and maintain insider lists of those individuals who hold inside information, ensuring that they are holding such information as a necessary part of their job;
- assume in the first instance that information relating to financial results could constitute inside information, but also ensure that a case by case assessment is made in respect of referring to the inclusion of inside information in any announcements to be released;
- have processes in place to ensure all information disclosed to the market is accurate and complete; and
- keep a written record of the assessment processes undertaken in respect of the timing and content of disclosure of inside information in case the issuer is required to submit this to the FCA for the purpose of cooperating with an enquiry.
Companies that operate with a significant level of outsourcing (eg investment companies) should ensure that their service providers (eg investment managers) fully understand the issuer’s obligations under MAR and have processes and training in place to ensure that inside information can be identified and escalated appropriately.
Preparing in this way on a regular basis should, if it becomes necessary, help listed companies respond clearly to the FCA in the event an enquiry or investigation is opened, by demonstrating that the company has undertaken the recommended assessments to identify any inside information held, the individuals who should be privy to such information, and any other circumstances the issuer has considered in deciding on the timing or delay of public disclosures in respect of such information.