The law on market abuse in Europe is changing. The EU market abuse regulation approved in spring 2014 will come into force in the EU on 3 July 2016. The market abuse regulation applies to regulated stock exchanges and to privately structured trading platforms as, for example, the over-the-counter trading of the German stock exchanges. We summarise the important provisions.
The insider trading prohibitions of the market abuse regulation include, as previously, insider transactions, recommendations or incitement to insider trading, as well as the unlawful disclosure of inside information. What is new is that attempted breaches and the cancellation of orders are now also covered. Under the law as it stood previously, these did not constitute infringements of insider trading rules, as no securities were acquired as a result of insider information.
Under the market abuse regulation, issuers are obliged to publish insider information. Publication may only be deferred if the publication could compromise the issuer’s legitimate interests, the deferral does not cause any misguidance and the issuer can ensure that the information remains confidential. The information must be published immediately if accurate rumours can be heard in the market which give rise to the supposition that confidentiality has not been maintained. While this has been the practice of Germany’s Federal Financial Supervisory Authority – BaFin – to date, it is now also explicitly required by law.
For the first time, the market abuse regulation sets out legal prescriptions on market sounding. Market soundings consist of approaches to selected investors in advance of new issues in the capital market in order to sound out the likelihood of an issue’s success. This can easily conflict with the prohibition of the disclosure of unauthorised insider information. The new provisions of the regulation are based on what was normal practice in advance of an issue but follow a formal approach. Thus, prior to the market sounding, the participant disclosing the information must (a) obtain the agreement of the recipient to obtaining insider information, (b) inform the recipient about the prohibitory provisions relating to insider trading contained in the market abuse regulation and (c) place the recipient under an obligation of confidentiality. Once the market sounding is over, the market abuse regulation requires that the recipient be informed as soon as the information it received no longer constitutes insider information.
In addition to the previous reporting obligations of directors and senior managers about their own transactions in securities issued by their company, the new market abuse regulation also stipulates, for the first time, a legal closed period for such transactions: in all cases, 30 days prior to the publication of financial results.
Issuers are also obliged to compile a list of the managers affected by this measure and of their close associates. Issuers also now have to inform directors and senior managers in writing about their obligations under the market abuse regulation. Directors and senior managers of the issuer are also required to inform relevant family members in writing about their obligations under the new regulation.
Enforcement authorities and sanctions
ESMA, the European Securities and Markets Authority, coordinates pan-European supervision of enforcement of the market abuse regulation. In future, BaFin’s administrative practice is expected to be more closely aligned with ESMA’s enforcement standards.
The enforcement authorities will make public the names of anyone found to be infringing legal provisions on insider trading (‘naming and shaming’), using digital media.
Fines imposed under the market abuse regulation can go as high as €5 million for individuals and up to 15 per cent of group turnover for legal entities; previously, the maximum fine was €1 million.