The Market Abuse (Directive 2003/6/EC) Regulations 2005 (the “Regulations”) implement the EU Market Abuse Directive in Ireland. The Regulations, which came into force on 1 July 2005, prohibit activities such as insider dealing and market manipulation, while also imposing obligations on issuers of securities or financial instruments regarding the disclosure of inside information and the maintenance of insider lists. The Regulations are supplemented by detailed administrative rules and relevant guidance published in February 2012 by the Central Bank of Ireland (the “CBI”) (the body designated as the competent authority in Ireland for the purposes of the Market Abuse Directive). The Regulations replaced the existing rules on insider dealing contained in the Companies Act 1990 to the extent that those provisions applied to dealings on regulated markets (such as the Main Securities Market of the Irish Stock Exchange). However, the provisions in the Companies Act 1990 continue to apply to dealings on non-regulated markets of the Irish Stock Exchange, such as the Enterprise Securities Market, the Irish Stock Exchange’s junior market.
Broadly speaking, the Regulations apply to any financial instrument admitted to, or for which a request for admission has been made to, trading on a regulated market in at least one member state of the EU or in an EEA member state (a “Member State”). In addition, the Regulations apply to actions carried out in Ireland concerning financial instruments admitted to, or for which a request for admission has been made to, trading on a regulated market in a Member State and have extra-territorial effect as they apply to actions carried out in Ireland or elsewhere concerning financial instruments admitted to, or for which a request for admission has been made to, trading on a regulated market in Ireland.
The term “financial instrument” is defined very broadly and captures transferable securities (shares, bonds etc.), units in collective investment undertakings, money-market instruments, financial futures contracts, equivalent cash-settled instruments, forward interest rate agreements, interest rate currency and equity swaps, derivatives on commodities and any other instrument admitted to, or for which a request for admission has been made to, trading on a regulated market in a Member State.
Under the Regulations, persons who hold inside information are prohibited, subject to some limited exceptions, from:
- using the information, to acquire or dispose of financial instruments to which it relates,
- disclosing the information to any other person unless in the normal course of their employment, profession or duties, and
- recommending or inducing another person to acquire or dispose of financial instruments on the basis of the inside information.
“Inside Information” is information of a precise nature, which has not been made public, relating directly or indirectly to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the price of those financial instruments or related derivative financial instruments. The definition of inside information also contains specific provisions relevant to derivatives on commodities and specifically relating to information obtained by stockbrokers in respect of their clients’ pending orders.
Under the Regulations, “information which, if it were made public, would be likely to have a significant effect on the prices of financial instruments or related derivative financial instruments” means information that a reasonable investor would be likely to use as part of the basis of the investor’s investment decision.
Information is of a “precise nature” if the information indicates a set of circumstances which exists, or may reasonably be expected to exist, or indicates an event which has occurred, or may reasonably be expected to do so, and the information is specific enough to enable a conclusion to be drawn as to the possible effect of the circumstances or event on the prices of financial instruments or related derivatives.
The extent of the insider dealing prohibition under the Market Abuse Directive has been the subject of a number of recent decisions of the European Court of Justice (the “ECJ”). In the 2009 Spector Photo case, Spector, a listed Belgian company, carried out a series of market purchases of its own shares to satisfy entitlements under an employee profit-sharing plan. Subsequently, Spector announced the proposed acquisition of a competitor and released interim financial results. In 2006, the Belgian Commission for Banking, Finance and Insurance held that the market purchases by Spector constituted insider dealing. Spector appealed that decision to the Appeal Court in Belgium, which in turn referred a number of questions to the ECJ. One of the questions put to the ECJ was how the reference to “using” inside information in the context of the Market Abuse Directive should be interpreted.
The ECJ decided that if a person in possession of inside information deals in a related financial instrument, they may be presumed to have used the inside information for the purpose of the dealing. This relatively strict approach was adopted as the ECJ considered the purpose of the Market Abuse Directive which, in its opinion, is “to protect the integrity of the financial markets and to enhance investor confidence, which is based, in particular, on the assurance that investors will be placed on an equal footing and protected from the misuse of inside information”. The ECJ did, however, note that it is possible to rebut the presumption of insider dealing by demonstrating that the transaction was entered into legitimately.
In the 2012 case of Daimler AG, the chairman of the Management Board of Daimler AG, over a period of two months, informed other board members and employees of his decision to take early retirement. An announcement was not made to the market, however, until the chairman’s retirement and replacement had been formally approved. Daimler’s share price subsequently rose and investors, who had sold shares in the days leading up to the announcement, claimed for damages on the basis that the information should have been disclosed at an earlier date. Initially, the Higher Regional Court in Stuttgart held that inside information had not come into existence until formal approval of the chairman’s retirement and replacement had been given. On appeal, the German Federal Court of Justice referred two questions to the ECJ on the interpretation of inside information, namely:
- whether intermediate steps, which have already been taken and which are connected with bringing about a future set of circumstances or future event, constitute precise information in themselves; and
- does the reference in the Market Abuse Directive to a “set of circumstances which may reasonably be expected to come into existence or an event which…may reasonably be expected to occur” require a high degree of probability, or, does it depend, in part, on the extent of the consequences for the issuer.
As regards the first question, the ECJ held that the Market Abuse Directive must be interpreted as meaning that intermediate steps in a protracted process could constitute “precise” information, for the purposes of the definition of “inside information”. The ECJ stated that this interpretation applied, not only to those intermediate steps which have already come in to existence or occurred, but also to intermediate steps which may reasonably be expected to come into existence or occur.
As regards the second question, the ECJ decided that the phrase “a set of circumstances which may reasonably be expected to come into existence or occur” refers to circumstances or events which, from an overall assessment at the time, appear to have a realistic prospect that they will come into existence or occur.
The Regulations also seek to tackle other types of behaviour in relation to share dealing which are perceived to be irregular, under the heading of “market manipulation”. The Regulations describe three principal types of market manipulation, which are prohibited, and provide specific examples. These are:
- Transactions which give, or are likely to give, false or misleading signals as to the market for or price of financial instruments, or transactions which, as a result of persons acting in collaboration, cause the price of financial instruments to stay at an abnormal or artificial level.
These transactions are prohibited unless the persons who entered into the transactions establish that their reasons for doing so are legitimate and that these transactions conform to “accepted market practices” on the market concerned.
“Accepted market practices” are practices that are reasonably expected in one or more financial markets and that are accepted by the CBI. A non-exhaustive list of factors to be taken into account by the CBI is scheduled to the Regulations and includes:
- the level of transparency of the practice to the market;
- the need to safeguard the operation of market forces such as supply and demand;
- the impact on market liquidity and efficiency;
- the trading mechanism of the market and the ability of market participants to react to the new market situation created by that practice;
- the risk to the integrity of related markets;
- the structural characteristics of the market and the type of market participant; and
- any investigation of the practice by competent authorities in other Member States.
The CBI must regularly review these practices, consult appropriate bodies and publicly disclose its decisions.
- Transactions which employ fictitious devices or any other form of deception or contrivance. When these types of transactions are being considered, the following signals will be taken into account:
- whether a person’s transactions are preceded or followed by the dissemination of false or misleading information by him (or persons linked to him); or
- whether a person undertakes transactions before or after they (or persons linked to them) disseminate research or investment recommendations which are erroneous or biased or demonstrably influenced by material interest.
- The dissemination of information (including rumours and false or misleading news) which is likely to give false or misleading signals as to financial instruments where the person knew or ought to have known that the information was false or misleading. This is in part aimed at financial journalists (and if they are acting in their professional capacity they will be assessed taking into account the rules governing their profession, unless they derive an advantage from the dissemination of the information). There are also additional provisions governing fair presentation of investment recommendations and the disclosure of conflicts of interest.
Specific examples of market manipulation provided by the Regulations include:
- conduct to secure a dominant position over the market for, a financial instrument, which has the effect of fixing prices or creating other unfair trading conditions;
- trading financial instruments at the close of the market with the effect of misleading investors acting on the basis of closing prices; and
- taking advantage of access to media by voicing an opinion about a financial instrument (or indirectly about its issuer) while having previously taken positions on that instrument and profiting subsequently from the impact of those opinions without having disclosed the conflict of interest publicly.
The Regulations deal with public disclosure in two principal ways; firstly, with clear rules as to when disclosure is required, and secondly, by forcing insiders to disclose their dealings. The CBI’s Market Abuse Rules provide further detail as to when this disclosure must be made and the form of notice required to be submitted to the Company Announcement Office of the Irish Stock Exchange.
When Disclosure Is Required
Issuers of financial instruments that are traded on a regulated market must inform the public, without delay, of inside information which directly concerns the issuer. The disclosure must be made in a manner which enables fast access and complete, correct and timely assessment of the information by the public and must not be combined with the marketing of their activities. They must also post all inside information that they are required to disclose publicly, on their website for at least six months. Issuers must take reasonable care to ensure that the public disclosure is synchronised as closely as possible between all categories of investors in the markets in all Member States where their financial instruments are traded. If there is a significant change concerning information already disclosed, issuers must publicly disclose the change through the same channel as the original disclosure, immediately after the change occurs.
Issuers may, however, delay public disclosure to avoid prejudicing its legitimate interests provided that this would not be likely to mislead the public and provided that it is possible to ensure the confidentiality of the information. Examples of such legitimate interests provided by the Regulations include on-going negotiations that would likely be affected by a public disclosure and, in certain limited circumstances, decisions made by the issuer’s management that require further internal approval. In such cases where disclosure is delayed, issuers must control access to the information in order to ensure its confidentiality, and in particular must:
- take effective measures to deny access to persons who do not require the information for the exercise of their functions within the issuer;
- take the measures necessary to ensure that persons with access to the inside information, acknowledge their legal duties and the sanctions for misuse of the information; and
- have measures in place which allow immediate public disclosure, in case the issuer is not able to ensure the confidentiality of the information.
In addition to the above requirements, the Market Abuse Rules also require issuers to document and maintain sufficient records to prove the existence of such legitimate interests, and to monitor the situation so, that if circumstances change, an immediate announcement can be made.
When an issuer of a listed financial instrument, or a person acting on its behalf, discloses inside information to a third party who is not under a duty of confidentiality, the issuer (or person acting on its behalf) must make public disclosure of that information, simultaneously, in the case of an intentional disclosure to the third party, and without delay, in the case of a non-intentional disclosure.
Issuers of listed financial instruments (or persons acting on their behalf) must keep a regularly updated list of those persons working for them who have access to inside information relating directly or indirectly to the issuer, and they must furnish this to the CBI upon request. Care should be taken when updating this list so as to include an issuer’s advisers.
Disclosure of PDMR Dealings
Persons discharging managerial responsibilities (a “PDMR”) within an issuer of financial instruments (and persons closely associated with them, such as spouses and children) must notify the CBI of transactions conducted on their own account relating to shares of the issuer (or derivatives) or other financial instruments of the issuer, within five business days. In addition to this, persons obliged to notify the CBI in this manner, must also notify the issuer of such transactions within three business days of the date on which the transaction occurred. The issuer itself must then announce details of the transaction to the Irish Stock Exchange by the close of business on the next business day. This notification must contain the following information:
- the name of the person;
- the reason for notification;
- the name of the issuer;
- a description of the financial instrument;
- the nature of the transaction;
- the date and place of the transaction; and
- the price and volume of the transaction.
Persons who produce or disseminate recommendations or research concerning financial instruments or issuers of those instruments, or other information recommending investment strategy to the public, must take reasonable care to ensure that such information is fairly presented and to disclose any interests. Public institutions, disseminating statistics liable to have a significant effect on financial markets, are required to disseminate them in a fair and transparent way.
Any person professionally arranging transactions in financial instruments, who reasonably suspects that a transaction might constitute insider dealing or market manipulation, must notify the Central Bank without delay (and must not inform any other person of this notification).
The Regulations do not prohibit an issuer from purchasing its own shares, trading in own shares in “buy back” programs (as described in the Market Abuse Directive), or trading to secure the stabilisation of a financial instrument (subject to some restrictions). Equally, transactions carried out in pursuit of monetary exchange rate, or a public debt management policy by a Member State, by the European System of Central Banks, by a national central bank or by any other officially designated body or by any person acting on their behalf, are not prohibited.
As mentioned above, the Central Bank of Ireland has been designated as Ireland’s “competent authority” for the purposes of ensuring that the above rules are enforced. It has been given broad supervisory, investigative and enforcement powers including the right to:
- access to any document;
- demand information from any person;
- carry out on-site inspections;
- require telephone and data traffic records;
- require the cessation of any practice contrary to the Regulations;
- suspend trading of the financial instruments concerned;
- request the freezing or sequestration of assets; and
- request temporary prohibition of professional activity.
In the event of breach of the Regulations, the CBI may, under administrative sanctions procedures, impose sanctions including:
- a private or public caution or reprimand;
- an administrative fine of up to €2,500,000;
- disqualification from being involved in the management of a financial service provider; and
- a direction to pay the costs involved in any investigation.
In addition to the above sanctions that may be imposed, Section 32 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 specifies the penalties on conviction on indictment of market abuse offences – the maximum sanction is a fine of €10,000,000 and/or imprisonment for a term not exceeding 10 years.
Section 33 also provides for civil liability for breaches of Irish market abuse law. It distinguishes between insider dealing offences and market manipulation offences. A party guilty of insider dealing is liable to pay compensation, to a party involved in the transaction who was not in possession of the inside information, for loss suffered as a result and account to the company for any profit made. A party guilty of market manipulation is liable to compensate parties dealing in shares as a result of the breach and to account to the company for any profit made. However, any action under Section 33 must be commenced within 2 years of the date of the contravention.
In October 2011 the European Commission published proposals for a new regulation and directive to replace the existing EU market abuse regime. The proposals include:
- An expanded definition of inside information, which need not be precise, for the purposes of the offences of insider dealing and improper disclosure, but not for the issuer's obligation to disclosure inside information to the market.
- The introduction of a new offence of attempted market manipulation.
- A new requirement for an issuer which delays the disclosure of inside information to inform the competent authority of its decision to delay disclosure once the information has been publicly disclosed.
- Confirmation that PDMR transactions include the pledging or lending of financial instruments, as well as transactions undertaken by a portfolio manager or other person on behalf of the PDMR or associate. The obligation to disclose PDMR transactions will not apply to transactions totalling under EUR 20,000 over the period of a calendar year.
- A requirement for insider dealing and market manipulation to be criminal offences if committed intentionally. Inciting, aiding and abetting and attempting those offences must also be criminal offences.
The proposals have passed to the European Parliament and the Council for negotiation and adoption in accordance with the ordinary legislative procedure.
Once adopted, it is proposed that the regulation will apply in all member states from 24 months after its entry into force, and that Member States will have the same period of time to implement the directive into national law.
 The phrase “persons discharging managerial responsibilities” means a person who is a member of the administrative, management or supervisory bodies of the issuer or a senior executive with regular access to inside information and having the power to make managerial decisions affecting the future development and business prospects of the issuer.