A second Market Abuse Directive (“MAD”) was launched in 2009 which aimed to modernise the first 2003 MAD. However, the volatility within financial markets combined with their increasingly global nature has caused MAD to become dated and less relevant. To combat this issue, on 3 July 2016, the new Market Abuse Regulation (“MAR”) and the Criminal Sanctions for Market Abuse Directive (“CSMAD”) replaced the MAD. MAR repeals the first MAD without any transitional relief having been developed in parallel with the revised Markets in Financial Instruments legislative package (“MiFID II”).
MAR significantly extends the reach of the European regulatory regime to capture a wider scope of markets, instruments and behaviours, and contains specific provisions to address the proliferation of technology-driven trading practices and platforms. Although there are similarities between MAR and MAD, some significant changes were made to increase investor protection. The European Securities and Markets Authority (ESMA) published technical standards which feature rules and procedures required by MAR, which have been approved by the European Commission and now form part of the ‘Regulation’.
KEY ISSUES TO CONSIDER REGARDING MAR
Inside information and Disclosure
- What is inside information?
This is defined in Article 7 of MAR as specific information relating directly to issuer(s) or financial instrument(s) that has not been made public and if publicised would significantly affect the price of those financial instrument(s).
- What do I need to disclose?
Firms have a duty to disclose any inside information to the public as soon as possible in a manner which allows “fast access and complete, correct and timely assessment of the information by the public” [1].
- Can a required disclosure be delayed?
There is a possibility to delay disclosure provided the following conditions are satisfied:
– disclosure is likely to prejudice the legitimate interests of the issuer;
– delay of disclosure is not likely to mislead the public; and
– the issuer can ensure the confidentiality of that information.
A notification will need to be made to the FCA as soon as the information is publically disclosed and an appropriate record will need to be kept. However, an explanation of how the conditions are satisfied will not be necessary unless specifically requested by the FCA.
In a recent consultation paper [2] on the implementation of MAR in the UK, the electronic means to submit such information were still to be detailed on the FCA website in due course.
- Insider dealing and unlawful disclosure
MAR provides that it is an offence to use inside information to amend or cancel an order. It will be considered to be insider dealing if one is recommending or inducing another person to transact on the basis of inside information which will amount to unlawful disclosure of inside information.
- Market manipulation
MAR extends the application of the market manipulation offence to capture attempted manipulation within its scope. Investors outside of Europe who have European investments should consider whether their compliance procedures and training requirements need to be updated to take account of the new rules.
New to MAR is the inclusion of new types of abusive behaviours related to algorithmic and high-frequency trading, which themselves are not necessarily forms of abuse. This has led to a concern that computer based trading has the potential for abusive practices.
Market soundings
- What are market soundings?
This is a new requirement under MAR and relates to the communication of information before an announcement of shares issued by the offeror (or third party acting on its behalf), in order to assess the likelihood of success for a particular issue of shares. It will drastically change the context of communications with potential investors especially during investor meetings and roadshows.
- What are the requirements prior/after conducting a market sounding?
– An issuer or disclosing market participant (“DMP”) must assess whether the market sounding will involve a disclosure of inside information.
– A written record of its decision is needed and must be made available to the regulator on request.
– A record of all the information given to potential investors who received a market sounding will need to be kept for five years and made available to the competent authority upon request.
- Am I entitled to any exemptions?
Yes, as a DMP you will be eligible for an exemption regarding the requirement to determine whether the market sounding involves disclosure of inside information if:
– consent is obtained from the person receiving inside information;
– the recipient about the prohibitive provisions relating to insider trading contained in MAR is informed; and
– potential investors are informed that they have a duty to keep the inside information confidential.
Persons Discharging Managerial Responsibility (“PDMR”) transaction reporting
- Who are PDMRs?
They are defined in statute as:
– directors of the issuer; or
– senior executives of the issuer who are not directors but will have regular access to inside information relating to the issuer and power to make managerial decisions which affect the future development and business prospects of the issuer.
- What transactions need to be reported?
Once transactions have exceeded EUR 5,000 for the calendar year, PDMRs must notify the issuer and the FCA of every transaction that is made subsequently which is on their own account and relate to shares or debt instruments of that issuer.
Provided that ESMA is informed of their decision, some regulators may opt for a higher threshold of EUR 20,000. However, the FCA has chosen not to increase the limit. Notification of transactions was previously provided for but MAR extends the scope to a wider range of market instruments and venues.
- Timeline for PDMR transaction reporting
Under MAR, PDMR transactions will need to be reported within three business days of the relevant transaction.
Suspicious Transaction Order Reporting (“STORs”)
- Who is required to report?
Article 16(2) of MAR requires “persons professionally arranging or executing transactions” to have operational procedures in place to prevent and detect any attempted market abuse. All investment managers will be considered as “persons arranging” transactions even if this role has been delegated to brokers for execution.
- What will happen if there is a suspicious transaction?
– An extensive investigation must be carried out in order to determine whether market abuse has occurred whenever a suspicious transaction has been flagged as suspicious.
– All relevant information about the transaction must be compiled.
– A decision will need to be made as to whether a STOR is submitted to the FCA based on the review of the information, a template of which was introduced by MAR.
– During the investigations there is a requirement to maintain sufficient records for at least five years of all investigations including those that are not reported to the FCA. Records of the investigation need to be made available on request.
How can Laven Partners help you prepare for MAR?
Laven Partners is able to provide services to help to facilitate the adoption of the new rules; such as advising on the adaptation of existing internal procedures and the creation of new policies and procedures which will comply MAR and the latest with FCA requirements.
Points to consider:
- Review and update of market abuse policies for MAR and latest FCA guidance
- Review and draft policies and procedures for investigating suspicious transactions
- Staff training to promote awareness of market abuse rules
- Review firm’s record-keeping policies and procedures and reviewing records of research and investment activity
[1] ESMA Technical standard page 42 – para 177
[2] https://www.fca.org.uk/news/ps16-13-implementation-of-the-market-abuse-regulations
