The European market abuse regime continues to evolve. On 26 June 2013, the European Council reached a compromise with the European Parliament on the draft text of the new market abuse regulation (Draft MAR) which is aimed at tackling insider dealing and market manipulation on European securities markets. The Draft MAR, together with a proposed directive on criminal sanctions for market abuse (CSMAD), will replace the existing directive on market abuse (Directive 2003/6/EC) (MAD). Click here to read the revised text.
Whilst MAD prohibits insider dealing and market manipulation on securities markets, new trading venues and the increased use of over-the-counter trading have not been subject to it. The Draft MAR extends the scope of the regulatory framework to financial instruments traded on new venues such as multilateral trading facilities and organised trading facilities, as well as to over-the-counter traded financial instruments.
The UK has an established criminal market abuse regime in place by virtue of the insider dealing offences set out in Part V of the Criminal Justice Act 1993 and the criminal offences of misleading statements and market manipulation under section 397 of the Financial Services and Markets Act 2000 (FSMA). Consequently, it has decided to exercise its discretion not to opt to implement CSMAD at this stage.
A few interesting insights
The agreed Draft MAR makes certain changes to the regime, including extending the scope of the regime to newly created trading platforms. Furthermore, issuers trading on 'SME Growth Markets' (which will be defined in the new Markets in Financial Instruments Directive (MIFID II) and is expected to include AIM and ISDX markets) will welcome measures aimed at reducing administrative burden for growing companies, for example, by not requiring them to produce insider lists. However, it is disappointing to observe that the definition of 'inside information' does not adequately reflect the importance of 'price sensitivity' when ascertaining what information is caught by the provisions, despite arguments put forward by lobbyists in member states (including the UK) prior to the negotiation of the texts. We briefly outline the position set out in the Draft MAR on inside information below.
The definition of 'inside information' in the Draft MAR, which follows the definition set out in MAD (and is similar to the definition set out in FSMA) 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 prices of those financial instruments or on the price of related derivative financial instruments.
In addition, the Draft MAR proposes an additional limb to the definition which states that information which, if made public, would be likely to have a significant effect on the prices of financial instruments, "shall mean information a reasonable investor would be likely to use as part of the basis of his investment decisions". The wording tracks the same wording in the Commission Directive (2003/124/EC) implementing MAD as regards the definition and public disclosure of inside information and the definition of market manipulation (Implementing Directive). Furthermore, similar wording is used in FSMA, which has caused considerable uncertainty in the UK.
It is not clear whether this provision means that:
- it is necessary to treat any information which a reasonable investor would be likely to use as part of the basis of his investment decision, as being likely to have a significant effect on the price of the financial instruments ("first construction"), or
- the issue of whether something is likely to have a significant effect on price needs to be considered from the perspective of the reasonable investor ("second construction").
The first construction does not appear to be the most logical interpretation of the new provision, yet there is a danger that this view might be adopted by the courts. There are many matters to which a reasonable investor might refer when deciding whether to invest and such matters may not of themselves have any significant impact in terms of the price of the relevant instruments. Guidance given by the Committee of European Securities Regulator's in their Level 3 Guidance of July 2007 (CESR/06-562b) in relation to the Implementing Directive provides that the "reasonable investor test…assists in determining the type of information to be taken into account for the purposes of the "significant price effect" criterion. This suggests that the reasonable investor test supplements the primary test as to whether information would be likely to have a significant effect on prices of financial instruments. Consequently, the second construction appears to be the more logical view of the provision which requires the significance of the price effect to be considered by a reasonable investor, rather than by an impulsive and rash one.
In our view, it would make sense for the test to be interpreted as a two limb test so that inside information:
- must be likely to have a significant effect on the price of the affected financial instruments, and
- must satisfy the reasonable investor test, so that a reasonable investor would use that information as part of the basis of his investment decision.
The equivalent FSMA provision was considered in the Financial Services Authority (FSA) Upper Tribunal case of David Massey v The Financial Services Authority (FIN/2009/0024). The Tribunal held that the phrase "significant effect on price" had a "specially extended" meaning in the FSMA provisions, which supplanted its ordinary meaning. The Tribunal chose to follow the first construction, by confirming that the 'significance' of the information fell on whether a reasonable investor would use it as part of the basis of his investment decisions, regardless of whether its effect on price would be significant. It is not clear how much importance should be attached to the FSA's decision as it is not technically binding law, although it does carry some weight given that it evidences the legal interpretation adopted by the FSA (now, the Financial Conduct Authority (FCA)), who are the enforcers of the provisions in FSMA. It remains to be seen whether the new FCA will adopt its predecessor's interpretation of the provisions.
As the Draft MAR will have direct effect in member states and will replace the national regimes in the areas that it covers, it is unfortunate that it does not provide further clarity on this issue and that the uncertainty around the language determining what constitutes 'inside information' remains. Consequently, it is hoped that the European Securities and Markets Authority will issue guidance to provide clarity on the interpretation of this provision to address this confusion.
The agreed compromise text will enable the European Council to start negotiations with the European Parliament on CSMAD, with the aim of adopting both Draft MAR and CSMAD at first reading. The Draft MAR also remains subject to further technical revisions in alignment with the final text of MIFID II and both are expected to come into force before 2015.