Update on
the new EU
Market Abuse
Regulation
Background
The changes to be considered by listed companies
The EU’s Market Abuse Regulation (“MAR”) becomes
directly applicable in European Member States from 3
July 2016. The new regulations apply equally to UK Listed
and AIM companies, as provisions relating to SME Growth
Markets, which were expected to reduce some of the
regulatory burden for AIM companies, will not apply until
January 2018 at the earliest.
Inside information
MAR aims to enhance market integrity and investor
protection and replaces the Market Abuse Directive (“MAD”)
currently in force. Although MAR is similar to the UK’s
existing regime its scope has been considerably expanded to
include financial instruments traded on multilateral trading
facilities, organised trading facilities and certain over the
counter activities including derivatives and credit
default swaps.
MAR also introduces new rules on the disclosure of inside
information, insider lists, and share dealings of persons
discharging managerial responsibilities (“PDMRs”). UK
listed and AIM companies will need to update their policies,
procedures and refresh the training provided to their
directors, PDMRs and employees to ensure consistency and
compliance with the new regime.
The definition of inside information is broadly unchanged
and reflects the interpretation that has been applied in case
law under MAD. Article 7 of MAR defines inside
information as:
“Information of a precise nature, which has not been made
public, relating directly or indirectly, to one or more issuers
or 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”.
Below is a comparison of the definition of inside information
under the Financial Services and Markets Act (“FSMA”)
and MAR:
Section 118C (FSMA 2000)
MAR Art 7 (1)
“precise nature”
“precise nature”
“not generally available”
“not generally available”
“relates directly or indirectly
to one or more issuers …or
qualifying investments”
“relating, directly or indirectly to
one or more issuers or ..financial
instruments”
“would, if generally available, be
likely to have a significant effect
on the prices”
“if it were made public, would be
likely to have a significant effect
on the prices”
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Disclosure of inside information
Safe harbour for market soundings
The provisions for disclosure of inside information under
Article 17 of MAD are very similar to the regime under MAR.
Companies have to disclose publicly all inside information
directly relating to them as soon as possible, subject to a
limited ability to delay disclosure (referred to in more detail
below). However, MAR also governs the content to be
included in disclosures of inside information and how such
announcements should be made.
Market sounding is the communication of information
prior to an announcement of a transaction, to one or more
investors in order to understand and gauge the interest of
potential investors.
Similarly, companies may delay disclosure of inside
information, provided certain conditions are satisfied.
However, when making such decisions companies must
comply with new formal procedures and keep records of
(amongst other things) when the inside information first
existed, the person(s) responsible for the decisions taken
in relation to the inside information and evidence of the
fulfilment of the conditions for delaying disclosure. Once
the inside information is made public the company must
simultaneously notify the competent authority (i.e, the
Financial Conduct Authority –“FCA” - in the UK) privately
of the delay. It must also provide a written explanation
of how the conditions for the delay were satisfied unless
the Member State has adopted the option to require
this information to be provided only if requested by the
regulator. The latter is the preferred position of the FCA, the
competent authority in the UK. If the confidentiality of the
inside information withheld from the market is subsequently
compromised, the company must disclose the information
as soon as possible.
Prior to making a market sounding, the participant
disclosing the information must follow the following steps:
Selective disclosure and rumours
MAR allows companies to selectively disclose inside
information, provided certain conditions are met. However,
if the company is the subject of a rumour which is
sufficiently accurate to indicate a breach of confidentiality
regarding inside information that has not been publicly
disclosed, an immediate announcement must be made.
The FCA proposes to retain the current requirements set
out in DTR 2.7.3 for dealing with rumours and DTR 2.5.7 in
respect of selective disclosure. The new regulation sets out legal formalities prior to a
significant securities transaction. The disclosure of inside
information for market soundings will be permissible if a
number of procedural conditions are satisfied.
–– Assess whether disclosure includes inside information,
maintain a written record of the analysis and provide
records on request of the FCA
–– Obtain consent from the buy side to being wall-crossed,
inform the buy side of the need for confidentiality and
their prohibition on trading on the information
–– Inform buy side when information is no longer inside
information
–– Ensure records are maintained of information given to all
recipients including date and times.
Insider lists
Whilst the concept of the insider list is the same as under
MAD, the procedural requirements in respect of MAR
differ significantly. Insider lists must be maintained in
an electronic format and be available to the national
competent authority on request. The details required to be
recorded have been expanded to include personal telephone
numbers, birth dates, birth surnames, national identification
numbers (national insurance number), and the date and
time when a person becomes an insider.
Advisers to the issuer will also need to maintain their own
insider lists however the issuer will need to ensure that their
obligations have been satisfied.
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There will be two types of insider list: a permanent list
and a project list. The draft implementing measures states
that those on a permanent list will be deemed to have
knowledge at all time. Permanent insiders need not be on
the Project List.
Persons Discharging Managerial Responsibility
(PDMRs)
PDMRs and Person’s Closely Associated (“PCA”) with them
(currently referred to as connected persons in the UK) are
required in accordance with MAD to disclose transactions
conducted on their own account in the issuers shares or
other financial transactions connected to them. This has
now been expanded and PDMRs are now required to notify
the issuer and the competent authority of every transaction
conducted on their own account relating to the shares
or debt instruments of that issuer or to derivatives linked
thereto (Art. 19 (1) MAR). The same applies PCAs.
The definition of a PCA to a PDMR in MAR Article 3 is the
same as the current definition of a connected person. A list
will need to be maintained of both PDMRs and PCAs.
A de minimis threshold will be applied so that transactions
below €5,000 (in aggregate) in a calendar year will not
need to be disclosed. The PDMR will need to disclosure
the transaction and notify the issuer and the FCA within
3 business days of dealing. The issuer will need to notify
the market by the end of this same deadline. This marks a
material change from the current regime where a threshold
is not applied and PDMRs have 5 days to undertake a
transaction. As with MAD, it will be the responsibility of
the PDMR and their PCA(s) to monitor their transactions,
to know when the threshold has been reached and then to
notify the issuer of any subsequent transactions. Issuers
may wish to require PDMRs to disclose all transactions even
if they are below the MAR threshold in order to monitor
ongoing compliance.
MAR Article 19 (7) provides a non-exhaustive list of
transactions, expanding the notification requirements to
dealings in any issuer securities and debt, and including the
following key areas of note:
–– Transactions undertaken by any person professionally
arranging or executing them on behalf of a PDMR or a
closely associated person, including where third party has
full discretion
–– Transactions under a life insurance policy (includes
transactions executed for the accounts of the PDMR or
the closely associated person by a third party exercising
discretion)
–– Transactions including gifts and inheritance undertaken
on their own account. (e.g. if the PDMR gave the gift or
donation) are considered to be in scope.
Close periods
All close periods will commence 30 days prior to the
publication of financial results.
If an issuer decides to apply a close period outside of
the specified MAR close periods, it must ensure this is
explained in its share dealing code and any other supporting
documentation.
Issuers will be required to ensure a list is maintained of
directors, PDMRs and relevant employees and their close
associates. The list is required so that individuals who are
likely to be in possession of inside information can easily
be identified and so that an issuer can maintain control of
the dissemination of inside information to those who need
to know and can control the dealing activities of those
individuals. It is important to note that the FCA can demand
to see the list.
The issuer will also be required to inform those on the list,
in writing, of their obligations under MAR and the PDMRs
will, in turn, need to inform their PCAs of their disclosure
requirements.
There are two exceptions to the prohibition of dealing
during a close period, these are:
–– Exceptional circumstance (Severe financial difficulty); or
–– Transactions where beneficial interest does not change.
–– Pledging or lending of financial instruments and
transactions undertaken by a portfolio manager on behalf
of the PDMRs and PCA must be notified even if the third
party has full discretion
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Model Code
The FCA proposes to replace the Model Code with Listing
rule 6.1.29 which will require issuers to have effective
systems and controls in place regarding PDMRs and their
PCAs in respect of their permission to deal in the securities
of the issuer.
Share buybacks
The FCA proposes to delete the prohibition of issuers
dealing in their own securities during a close period. A full
list of buy backs undertaken by an issuer during the previous
5 year period must be posted on the issuer’s website.
Investment funds
Under the old rules (Listing Rule 15.5.1(4)) Investment trusts
could buyback their own shares and PDMRs were permitted
to trade during a close period provided the Board satisfied
themselves that there was no inside information leading
up to the announcement of the results of the relevant
period other than the information that has already been
announced provided they make the relevant stock exchange
announcement. Under the new regulations this rule will
be abolished.
AIM
AIM companies will need to comply; however under MAR,
a slight relaxation to the rules on insider lists will apply
for companies on “SME growth markets”. However this
relaxation will only apply from January 2018, as it is not
until then that the legislation under which markets can seek
to be designated as SME growth markets will come into
effect. Therefore, even if AIM does in due course choose
to seek SME growth market status, there will be an initial
period during which AIM companies will need to fully
comply with MAR.
disclosure or market manipulation. For individuals, fines of
up to €5 million can be imposed for insider dealing, unlawful
disclosure or market manipulation. Member states will
still be able to impose a higher, but not a lower maximum
penalty. Fining policy must take into account a range of
factors, such as profit and loss made and the level of cooperation with authorities.
In the UK the FCA already has the power to impose
unlimited fines and to publish enforcement outcomes and
the enforcement power set out in MAR is not expected to
change.
The Criminal Sanctions for Market Abuse Direct (“CSMAD”)
complements MAR by introducing minimum rules on
criminal offences and criminal sanctions for market abuse.
EU member states have the option to retain or adopt more
stringent criminal provisions. The UK has opted out of
CSMAD and will keep its existing separate criminal regime
for insider dealing in the UK Criminal Justice Act 1993.
Timetable for implementation of MAR:
Activity
Date
MAR published in the EU Official
Journal
June 2014
ESMA published first final report
on implementing measures
February 2015
ESMA published second final
report on implementing measures
September 2015
EU Commission published
December 2016
Delegated Regulation and Annexes
FCA and Treasury Consultation
paper deadliness
4 February 2016
EU Commission ESMA finalise
implementing measures and
technical standards
April/May
Enforcement authorities and Sanctions
FCA consultation paper response,
guidance and final rules
April/May 2016
The European Securities and Markets Authority (“ESMA”)
co-ordinates the pan-European supervision of enforcement
of MAR. MAR provides the power to impose administrative
measures, sanctions or fines. For companies fines can be
imposed of up to €15 million or 15% of annual turnover in
the preceding business year for insider dealing, unlawful
Implementation date
3 July 2016
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Next steps for MAR
In preparation for MAR on 3 July 2016, you will need to
review and update the Company’s internal systems, policies
and procedures for the identification and disclosure of inside
information to align with MAR. The areas of consideration
are as follows:
–– The development or procurement of training on MAR
to ensure the Board, PDMRs and employee insiders are
aware of their responsibilities, obligations and revised
procedures and policies
–– The consideration of the establishment of a Disclosure
Committee, if the issuer does not already have such a
body in place to monitor compliance with MAR and the
control of inside information (including the development
of a protocol concerning market soundings)
–– The updating of the arrangements for the corporate
website to take account of the changes to the
requirements for the display of inside information (now
5 years).
Templates
–– The establishment and implementation of new insider
If you need assistance we can provide the expertise and
lists, having given due consideration of the approach to be the resources to assist in developing the following areas to
taken in respect of permanent and project lists, gathering ensure compliance:
of additional information and ongoing maintenance
–– Training for Board members, PDMRs and relevant
employees;
–– The review and updating of the share dealing code
(including updates to acknowledgement forms),
–– Reviewing templates;
disclosure manual and insider list maintenance policies
–– The implementation of notification templates for PDMRs
and PCAs
–– Creating insider lists.
–– The review and, if necessary, updating of related party
policies and share plan rules in alignment with MAR
–– The establishment and implementation of procedures for
market soundings and the delay of inside information
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