Where we are now
The Market Abuse Regulation (EU) No 596/2014 ("MAR") entered into force on 3 July 2016 and issuers must update their internal guidelines and processes to conform to the new regime. MAR constitutes directly applicable law in EU Member States, the purpose of which, together with the Directive on Criminal Sanctions for Market Abuse (2014/57/EU, "CS MAD"), is to safeguard market integrity and protect investors by replacing the existing Market Abuse Directive (2003/6/EC).
MAR will result in changes to the obligation of issuers to disclose inside information, rules regarding delayed disclosure, the reporting of transactions by persons discharging managerial responsibilities and persons closely associated with them (Sw. personer i ledande ställning och deras närstående), and to the offences of insider dealing and unlawful disclosure of inside information. In addition, changes will also be made to the requirements and standards relating to insider lists, market manipulation, market soundings, buy-back programs, stabilization measures and whistleblowing.
In addition to being directly applicable law, MAR will also have an impact on national legislation. For instance, overlapping provisions in a number of Swedish laws, including The Act concerning Reporting Obligations for Certain Holdings of Financial Instruments (2000:1087) (Sw. lag om anmälningsskyldighet för visa innehav av finansiella instrument) which will essentially be repealed, and amendments will be made to several other Acts regulating the financial instruments market. Further, CS MAD complements MAR by requiring all Member States to provide for harmonized criminal laws in respect of insider dealing, unlawful disclosure of inside information and market manipulation, leading also to more stringent sanctions for breaches of insider rules. In Sweden, it is expected that the revised sanctions regime will enter into force earliest in February 2017.
MAR represents a new regime with novel solutions to the regulation of insider matters, and many aspects of MAR need to be carefully considered not only by issuers, but also by regulators. We discuss below selected issues that have arisen during the preparation process for the MAR regime.
Certain considerations for issuers
Management of inside information and internal procedures for delaying disclosure. If they have not done so already, issuers should review their internal guidelines to ensure that they have appropriate procedures in place to comply with the new regime. In general, the delay of disclosure and management of inside information require introduction of new internal procedures, the appointment of responsible individuals and efficient management of insider lists and delayed disclosure databases.
Issuers should have internal procedures in place to (i) assess whether certain information constitutes inside information, and (ii) if so, make the decision to immediately disclose the information or, if the requirements are met, delay the disclosure of the information, and (iii) if the disclosure is delayed, simultaneously establish a project-specific insider list. All of these steps need to be properly documented.
Permanent insiders in the issuer's insider list. The approach of the European Securities and Markets Authority ("ESMA") is that permanent insiders are deemed to have knowledge of all inside information from the moment it originates at the issuer. However, in reality, there may be sensitive situations where only a few individuals, e.g. the Chairman of the Board and the Managing Director, have knowledge of certain inside information. It may thus not be appropriate to define individuals as permanent insiders at the outset, and, in practice, it may not be that cumbersome to list the individuals separately in each of the project-specific insider lists. We understand that many issuers have opted not to include a permanent section in their insider lists and we recommend this practice.
Detailed information on insiders. MAR increases the extent of information required on each insider to be recorded in the issuer's insider lists, and also requires a written acknowledgement by the insiders of their obligations arising from the entry in the insider list and related sanctions.
Definition of managers' closely associated persons for transaction reporting. MAR provides that persons discharging managerial responsibilities at an issuer ("Managers") as well as persons closely associated with them ("Related Parties") must notify the issuer and the Swedish Financial Supervisory Authority ("SFSA") of the transactions conducted by them on the issuer's financial instruments. Issuers must inform their Managers about this reporting obligation and provide sufficient instructions for the Managers on the submission of the transaction notifications in practice, as well as on the Managers' obligation to inform their Related Parties of this obligation. Issuers should also keep a list of the Managers and their Related Parties and for this purpose, ask their Managers to provide the issuer with sufficient identification information for their Related Parties (e.g. name, date of birth/Business Identification Code or similar, and contact details for potential questions on the notifications).
The scope of the financial instruments and transactions to be notified by the Managers and their Related Parties is broad and encompasses virtually any acquisitions, disposals or transfers (including e.g. pledging, lending, and transferring by gift or inheritance) of any equity, debt or derivative instruments. Issuers should appoint responsible individuals to keep track of and store all notifications received. It should be noted that the Managers and their Related Parties shall register an account on the SFSA's webpage where the reporting shall take place.
Pursuant to MAR, a Related Party is defined as:
- a spouse, or a partner considered to be equivalent to a spouse in accordance with national law;
- a dependent child, in accordance with national law;
- a relative who has shared the same household for at least one year on the date of the transaction concerned; or
- a legal person, trust or partnership, the managerial responsibilities of which are discharged by a person discharging managerial responsibilities or by any of the persons referred to above, which is directly or indirectly controlled by such a person, which is set up for the benefit of such a person, or the economic interests of which are substantially equivalent to those of such a person.
Controlled corporations as Related Parties. Due to differences in the various language versions of MAR, the question as to when a corporation should be defined as a Related Party under d) above is still awaiting clarification by the European Parliament. The main question is whether it is sufficient that a Manager or their Related Party holds a managerial position at a corporation, or whether a relationship of control or an ownership or economic interest is also required. The SFSA has confirmed that until this issue has been clarified, it will not apply a broad definition of Related Party corporations, but instead will define Related Party corporations as corporations in which Managers or their physical Related Parties are performing managerial responsibilities, and to which such person has an ownership-related connection, or whose economic interests are substantially equivalent to the interest of such a person. The SSA believes that the requirement is satisfied if the Manager or the physical Related Party owns shares in the corporation equivalent to at least 10 percent of the corporation's share capital or voting rights.
Issuers should also prepare for the situation where they themselves are classified as Related Parties in relation to other issuer(s) and thus are subject to the transaction reporting obligation for the financial instruments of such other issuer(s), especially if the European Parliament confirms the broad definition of controlled corporations discussed above.
Closed periods. MAR provides that the Managers must comply with a closed period of 30 days prior to the publication of the issuer's financial reports. The closed period prohibits virtually all transactions by the Managers in the issuer's financial instruments on the Managers' own account or for the account of a third party. However, should any inside information emerge in connection with the preparation of financial reports, all persons, whether Managers or not, must be listed in the relevant insider list and may be prohibited from conducting transactions. If the issuer wishes to delay the disclosure of such information, the issuer must assess if the criteria for such delay is fulfilled.
Whistle-blowing. Issuers must have appropriate procedures in place for their employees and other individuals in their service to report infringements of insider rules and regulations to the issuer. These procedures may be based on the issuer's existing whistle-blowing procedures, but should be reflected in the issuer's updated insider guidelines.
Market soundings. Following the entry into force of MAR, the way in which market soundings are conducted in connection with capital market and other transactions will be strictly regulated. Any information disclosed in connection with a market sounding must be duly recorded, and e.g. a specific consent must be obtained from the recipient if inside information is disclosed. Issuers and other market participants must ensure that a certain standard and identical set of information is provided to each recipient in connection with a market sounding, and also maintain detailed records of all the market soundings they have conducted. It is recommended that issuers and other market participants prepare their own market sounding checklists and manuals to ensure they comply with the new requirements.
Transition of existing insider projects. All new insider projects within issuers are subject to MAR as from 3 July 2016. However, it is proposed that insider lists relating to previously existing insider projects does not need to be converted into the new regime unless changes are made. This means that the existing, pending insider lists do not need to be updated to satisfy the MAR requirements but any updates of such lists must be updated in accordance with the new regulations.