On 3 July 2016, a new market abuse regime will come into force across the EU, replacing the existing EU regime (in force in Ireland since 2005). For the first time, issuers of debt securities listed on unregulated markets across the EU, including the Irish Stock Exchange’s Global Exchange Market (GEM) will be in scope.
This Briefing summarises key areas of this new regime that issuers of debt securities listed on GEM should be aware of and what steps those issuers should take now to ensure that they can comply with the new regime from 3 July 2016.
The new market abuse regime will comprise a Market Abuse Regulation (MAR) and a Market Abuse Directive (CSMAD). MAR will set out the revised market abuse framework, while CSMAD will set out minimum rules for the criminal sanctions that member states must impose for breaches of the new framework.
While the existing EU regime was based on a 2003 Directive, MAR is a regulation which will be directly effective in each EU Member State without the need for domestic legislation. This is to ensure consistency of implementation. CSMAD will require domestic legislation (further detail is set out later in this briefing under ‘Civil and criminal sanctions’).
KEY POINTS FOR ISSUERS TO NOTE
The new market abuse regime:
- prohibits insider dealing, market manipulation (attempted, or actual) or the unlawful disclosure of inside information; and
- imposes obligations in relation to:
- the disclosure of inside information;
- putting insider lists in place; and
- reporting transactions by managers.
An explanation of the following key terms is set out at the back of this briefing: inside information, market manipulation, insider dealing, PDMRs and persons closely associated with PDMRs.
- When inside information must be disclosed:
An issuer must disclose inside information to the public where that information directly concerns the issuer. The information must be made public in a manner which enables it to be accessed quickly by the public and cannot be disclosed in conjunction with any marketing by the issuer of its activities. The information must also be published and maintained on the issuer’s website for at least 5 years. Disclosure can be delayed, but only if immediate disclosure could prejudice the issuer’s legitimate interests, the delay is unlikely to mislead the public and the issuer is able to ensure confidentiality of the information. For an issuer to be able to delay the disclosure of inside information, all of the above conditions have to be met. The issuer will be required to inform the Central Bank about the delay immediately following disclosure and confirm the conditions were met.
Where the issuer is a credit institution or financial institution, it can also delay disclosure if disclosure risks undermining the financial stability of the issuer and the financial system, it is in the public interest to delay. The issuer can ensure the confidentiality of the information and the Central Bank has agreed to the delay.
- Inside information cannot be unlawfully disclosed:
Unlawful disclosure of inside information will occur where a person is in possession of inside information and discloses it to someone else (unless that disclosure takes place in the course of the exercise of his employment or professional duties).
- Insider dealing is prohibited:
Engaging, or attempting to engage, or recommending that another person engage, or inducing another person to engage, in insider dealing is prohibited by MAR.
- Market manipulation is prohibited:
Engaging in either market manipulation or attempted market manipulation (i.e. placing an order that isn’t executed, or giving an instruction that isn’t processed) is an offence under MAR.
There is an exception from the prohibition on market manipulation where the behaviour conforms to an accepted market practice (AMP). ESMA will maintain a list of approved AMPs.
A competent authority can establish an AMP (and must notify it to ESMA) where the market practice provides for transparency, ensures safeguards, has a positive impact on the liquidity of the market, does not create risks for the market, takes the market’s trading mechanism into account and allows participants to react in a timely manner.
- Insider lists must be prepared and maintained:
Issuers must prepare and maintain insider lists. These are lists of those who have access to inside information and who work for the issuer, whether as employees or in another capacity that gives them access (such as advisors and accountants). The insider lists must be provided to issuer’s competent authority on request, and must be maintained for 5 years after they were prepared or last updated.
The required form of insider list is set out at Annex I to the Commission Delegated Regulation published on 11 March 2016. Details to be included for each insider are: first name, surname, birth surname, work telephone number (landline and mobile), company name and address, function and reason for being an insider, when the person obtained the inside information, when the person ceased to have the inside information, date of birth, national identification number, personal telephone numbers and personal home address.
Issuers should take steps to ensure that those on the list acknowledge their legal and regulatory obligations and confirm awareness of sanctions for insider dealing and the unlawful disclosure of inside information.
If an issuer delegates the preparation and maintenance of an insider list to a third party, the issuer is still responsible under MAR.
- Transactions involving PDMRs must be reported:
A PDMR and persons closely associated with him must notify the issuer and the ISE of every transaction conducted on his own account relating to the shares or debt instruments of that issuer, or to derivatives or other financial instruments linked to those shares or debt instruments.
Those transactions must be promptly disclosed within 3 business days to both the issuer and the competent authority. The issuer must also ensure that any notification of such a transaction is promptly publicly disclosed within 3 business days.
PDMRs transactions must have reached a cumulative €5,000 in a calendar year (with no netting) before disclosure is required. The competent authority can raise this threshold to €20,000 (but must notify ESMA of this, and justify it by reference to market conditions).
CIVIL AND CRIMINAL SANCTIONS
MAR provides that Member States must ensure that insider dealing, the unlawful disclosure of inside information, market manipulation, breach of the obligation to publicly disclose inside information, breach of the obligation to prepare and maintain insider lists and breach of the obligations regarding PDMRs are the subject of administrative sanctions.
At a minimum, those administrative sanctions must include:
- a ‘cease and desist’ order;
- giving up the profits gained or losses avoided as a result of the breach;
- public censure;
- withdrawal or suspension of an authorisation (in the case of an investment firm); and
- a temporary ban on a PDMR or another natural person from dealing on own account.
Penalties under the Companies Act 2014 may also apply.
CSMAD also requires that serious cases of insider dealing, market manipulation and unlawful disclosure of inside information constitute criminal offences when committed with intent. CSMAD sets out minimum rules so Ireland and other Member States may adopt more stringent rules. Domestic legislation is required and is expected to be published closer to the transposition deadline of 3 July 2016.
Issuers with debt securities listed on GEM, or who expect to list debt securities on GEM, should immediately take steps to:
- prepare policies and procedures as to how inside information is dealt with, both internally within the issuer and when publication is required;
- ensure that employees, PDMRs and closely associated persons are aware of their obligations under the new market abuse regime, and sanctions for breaches of those obligations;
- prepare insider lists; and
- prepare list of PDMRs and closely associated persons.
Inside information is information that:
- is of a precise nature,
- has not been made public,
- relates, directly or indirectly, to one or more issuers or one or more financial instruments, and
- if made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.
Whether information could have a significant effect on price will be assessed by reference to a “reasonable investor” i.e. would a reasonable investor be likely to use that information as a basis for making an investment decision?
EXAMPLES OF MARKET MANIPULATION
- Entering into transactions, placing orders or any other behaviour which:
- give or could give false or misleading signals as to the supply of, demand for, or price of, a financial instrument;
- secure, or could secure, the price of one or more financial instruments at an abnormal or artificial level, unless the person can show that this has been done for legitimate reasons, and conforms with an accepted market practice.
- Entering into transactions, placing orders or any other behaviour which affects or could affect the price of one or more financial instruments, using a fictitious device or other deception.
- Disseminating information through the media, including online, or by any other means, which gives or could give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument or secures or could secure the price at an abnormal or artificial level.
Insider dealing is where a person uses inside information to obtain an unfair advantage by buying or selling the financial instruments to which the information relates, or by changing or cancelling an order that was placed before he/she became aware of the inside information.
PDMRS AND PERSONS ‘CLOSELY ASSOCIATED’ WITH THEM
A PDMR is a person discharging managerial responsibilities. In respect of an issuer, this is a member of the administrative, management or supervisory body of the issuer or a senior executive who is not a member of one of those bodies, but has regular access to inside information in relation to the issuer and the power to take managerial decisions affecting the future developments and business prospects of the issuer.
A person closely associated with a PDMR is a spouse or partner, a dependent child, a relative who has lived in the PDMRs home for at least the last year, or a legal person, trust or partnership, the managerial responsibilities of which are discharged by a PDMR or by a person closely associated with him/her, 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.