Background and the stated aims of MAR
The new EU Market Abuse Regulation (Regulation 596/2014) (MAR), which repeals and replaces the existing Market Abuse Directive (2003/6/EC) (MAD), and its national implementing legislation, took effect on 3 July 2016. MAR will have direct effect in the UK and other European Economic Area (EEA) states.
The principal aims of MAR are to ensure market integrity and enhance investor protection by extending the reach of the European capital markets regulatory regime to cover a broader range of markets and financial instruments. Specific provisions are also introduced which seek to address the difficulties is managing and regulating the proliferation of technology-driven trading practices.
Although MAR bears similarities to the existing UK regulatory framework, there are key differences which will serve to extend the scope of the market abuses regime, clarify certain permitted behaviours and alter the ways in which directors and senior managers of relevant firms (issuers) are required to conduct certain activities.
In the UK, MAR replaces the market abuse provisions in Part VIII of the Financial Services and Markets Act 2000 (FSMA). It is also expected that substantial changes will be made to the Model Code in Chapter 9 of the Listing Rules, as well as to the guidance on the Code of Market Conduct in the FCA Handbook.
This briefing provides an overview of some of the key changes which will affect issuers and their officers.
The application of MAR – ‘financial instruments’
The prohibitions on insider dealing and unlawful disclosure under MAD applied to all financial instruments admitted to trading on regulated markets within the EEA (together with certain related financial instruments). MAR extends the number and type of instruments to which the prohibitions apply to cover:
- Financial instruments traded on an organised trading facility (OTF) or on a multilateral trading facility (MTF) (such as the Alternative Investment Market (AIM)); and
- Financial instruments the price or value of which depends on, or has an effect on, the price or value of a financial instrument traded on a regulated market, MTF or OTF, including, but not limited to, credit default swaps and contracts for difference.
A non-exhaustive list of defined financial instruments to which MAR applies is included at Annex 1 of the Markets in Financial Instruments Directive (Directive 2004/39/EC). The list of MAR-scope financial instruments will be maintained by the European Securities and Markets Authority (ESMA). Key changes and new requirements
- Insider information and dealing – The insider dealing prohibitions of MAR include (as under MAD), insider transactions, recommendations or incitement to insider trading and unlawful disclosure of insider information. New under MAR is that attempted breaches and the cancellation of orders are also now within the scope of the prohibitions. MAR introduces a new definition of ‘inside information’ which is substantively similar to the definition presently found in section 118C of FSMA.
As with MAD, under MAR, issuers are obliged to publish insider information immediately if accurate rumours arise in the market which would lead to the reasonable supposition that appropriate confidentiality has not been maintained. Under MAR publication may only be deferred if a) disclosure is likely to prejudice the legitimate interests of the issuer; b) delay of disclosure is not likely to mislead the public; and c) the issuer can ensure confidentiality of the information. Issuers will also be required to inform the competent national authority that disclosure has been delayed; together with a written explanation of how the above conditions were satisfied (although in the UK it is proposed that this explanation will only strictly be required if so requested by the FCA)
- Directors’ dealings – In addition to the current obligations on directors and senior managers to report on their own interests in transactions in the securities of their company, MAR also imposes a strict closed period for any such transactions: 30 days prior to the publication of annual financial results. Issuers will be required to compile and maintain a list of all directors and senior managers (and any of their associates) that may be affected by the measures provided for under MAR, including all those employed by the issuer that may be privy to insider information or those with interests in transactions in the securities of their company. MAR provides a set format for the specific information that must be maintained by the issuer in this regard.
Issuers will also be required to inform their directors and senior managers in writing about their ongoing obligations under MAR. Moreover, in appropriate circumstances directors and senior officers of the issuer are required in turn to inform relevant family members and close associates in writing about their obligations under MAR (for example in the event close associates or family members have, or may obtain, an interest in the securities of the manager’s company).
- Market soundings – MAR extends MAD to include provisions relating to any approaches an issuer may make to selected investors in advance of new issues in the capital markets, a process typically undertaken in order to sound-out the prospects of success of a particular transaction (also known as the pre-marketing process).
The reasoning behind introducing the new prohibitions on the market sounding process is that often the approaches to selected investors operate in an area that can easily stray into conflict with the prohibitions on the disclosure of unauthorised insider information.
Under the new regime, prior to a market sounding exercise being undertaken, the participant disclosing the information is required to:
- Obtain the agreement of the recipient to receiving insider information;
- Inform the recipient in writing about the prohibitions on insider dealing contained in MAR; and
- Ensure the recipient agrees in advance to be placed under a duty of confidentiality in respect of the insider information to be disclosed.
Once the market sounding exercise is over, MAR dictates that the recipient must be informed as soon as the information it has received no longer constitutes insider information.
Further specific applications under MAR – ‘market manipulation’
MAR’s market manipulation provisions also extend the reach of the regulatory regime to cover:
- Conduct leading to the provision of false or misleading information in relation to any spot commodity contract having, likely to have, or intended to have an effect on the price or value of a financial instrument;
- Any apparent manipulation arising from ‘behaviour in relation to benchmarks’ (in light of recent LIBOR/EURIBOR controversies); and
- Algorithmic trading and high-frequency trading (or attempted trading) that delays or disrupts, or is likely to delay or disrupt, the functioning of a trading system, makes it more difficult to identify genuine orders or creates false or misleading signals about supply or demand or the price of a financial instrument.
Enforcement and sanctions
ESMA will coordinate enforcement of MAR across the EEA. The FCA will have conduct for specific enforcement in the UK. These enforcement authorities will make public the names of anyone found to be infringing the legal provisions on market manipulation and insider trading (‘naming and shaming’), and may do so using digital media.
Fines imposed under the MAR may be as high as €5 million for individuals, and €15 million, or 15% of annual turnover, for a corporate entity found to be in breach of the regulatory regime.
Conclusion and key points to note for issuers
Issuers should consider taking the following action:
- Update internal policies and procedures relating to share dealing codes, insider information policies and procedures for market sounding exercises; and
- Provide training and written guidance to directors, senior managers and other relevant employees on their obligations under the new regime.