Update
July 2005
Financial Services & Insurance
Market Abuse Directive - UK Implementation on 1 July 2005
Although the objectives of the Market Abuse Directive are broadly the same as the aims of the
UK's current market abuse regime, it is not safe to assume that practices or behaviour acceptable
under the current regime will continue to be acceptable after 1 July 2005.
Introduction
2004. Only one state implemented it on time and the UK
implemented it on 1 July 2005.
The difficulty faced by the UK law enforcement authorities
in successfully bringing convictions for insider dealing led to
The New Regime
the creation of the civil offence of market abuse from 1
December 2001 (the ‘2001 Regime’). Anyone may be liable
Unfortunately for UK market participants, the EU did not
for market abuse, not just those companies and individuals
simply adopt the UK's 2001 regime. Predictably there was
which are regulated by the Financial Services Authority
reluctance to accept the UK's regime without change, with
(FSA).
politics playing its part. In addition, the Directive is based
on a new multilayered legislative model whereby the
Market abuse, as a civil offence, is one of which a person can
Directive sets out a broad framework which is then filled in
be found guilty without the criminal evidential test of
with detail by committees of European securities regulators.
‘beyond reasonable doubt’ being satisfied. In order to find
These factors have resulted in the new Directive having
someone guilty of market abuse, all that the FSA has to
broadly the same goals as the 2001 UK regime, but achieved
show is that, on the balance of probabilities, it is more likely
by different means and with different ‘safe harbours’ or
than not that the person committed market abuse. Because
situations where a person can be confident that he is not
it is not criminal, no-one can be imprisoned for market
committing market abuse.
abuse, but those found to be in breach can face unlimited
fines. The FSA has imposed very significant fines for market
Thus, although the aims of the Directive are broadly the
abuse on both individuals (the largest fine on an individual
same as the aims of the 2001 regime, it is not safe to
has been £290,000) and companies (the largest fine on a
assume that practices or behaviour acceptable under the
company has been £17 million).
2001 regime will continue to be acceptable after 1 July
2005.
The rest of the EU was persuaded by the UK that having
such a civil liability regime was a good idea and would help
There are also new obligations imposed by the Directive,
member states to bring more successful actions against
notably the requirement on all issuers of listed securities
persons engaging in a range of commercially logical trading
(and issuers who have made or approved applications for
strategies which are frowned upon by regulators. This led to
listing of securities) to promptly disclose all inside
the passing of the Market Abuse Directive (‘the Directive’) to
information to the market, the requirement on listed issuers
require all EEA states to implement, in their own laws, a
to maintain lists of insiders in relation to each piece of
regime similar to that in the UK. The Directive was
inside information, the requirement on senior managers of a
supposed to be implemented across the EEA by October
listed issuer (not just directors) to report all of their own
Continues on reverse
transactions (and transactions of their family and other
New Definition of Market Abuse
connected persons) in the issuer's shares to the market and
the obligation on banks and brokers to report any suspicions
The seven types of behaviour that constitute market abuse
of market abuse to the FSA.
from 1 July 2005 are:
New Scope of Market Abuse
z
Insider dealing - dealing or attempting to deal, by an
insider, in an investment on the basis of inside
Under the Directive, there are more financial instruments to
which the rules apply and the territorial scope is widened.
information in relation to the investment.
z
Improper disclosure of inside information - disclosure
The new regime encompasses both insider dealing and
by an insider of inside information to another person
market manipulation with seven types of behaviour which
otherwise than in the course of his employment,
are now classed as market abuse. The definition of insiders
profession or duties.
is widened. The role of the hypothetical ‘regular user’ of the
z
Misuse of information - any behaviour which is based
market, used in defining much of the previous market abuse
on information not generally available to those using the
regime, is limited and largely replaced by more detailed rules
market but which would be, or would be likely to be,
which, nonetheless, have a broadly similar effect. But note
regarded by a regular user of the market as relevant
that although the civil regime changed from 1 July 2005, the
when deciding the terms on which transactions in
criminal offences of insider dealing and market manipulation
qualifying investments or related investments should be
remain unchanged. A person may be liable for market abuse
effected, if the behaviour is such that it is likely to be
even if he had no intention to commit market abuse. For
regarded by a regular user of the market as a failure to
most of the heads of offence, there is now no defence that
observe the standard of behaviour reasonably expected
an objective ‘regular user’ would find the conduct
of a person in his position in relation to the market.
acceptable.
z
Manipulating transactions - effecting, or participating
in effecting, transactions or orders to trade which give or
While the new disclosure rules only cover shares in
are likely to give a false or misleading impression as to
companies listed on a ‘regulated market’ (i.e. including the
the supply, demand, price or value of a qualifying
London Stock Exchange main market but excluding the AIM
investment or related investment, or which secure the
market), the part of the new UK regime which prohibits
price of such an investment at an abnormal or artificial
market abusive behaviour covers:
level.
z
z
Every financial instrument traded on every regulated
effecting, transactions or orders to trade which employ
market in Europe (or for which an application for
fictitious devices or any other form of deception or
admission to trading has been made). UK markets
contrivance.
include the London Stock Exchange (both the full list
z
z
Manipulating devices - effecting, or participating in
z
Disseminating information likely to give a false or
and AIM), the OFEX market and commodity derivative
misleading impression - disseminating, or causing the
markets.
dissemination of, information by any means which gives,
All transactions relating to those instruments even if
or is likely to give, a false or misleading impression as to
carried out off-market.
a qualifying investment or related investment by a
In addition to behaviour in relation to financial
person who knew or could reasonably be expected to
instruments traded on a regulated market, behaviour in
have known that the information was false or
relation to other, related, instruments or underlying
misleading.
commodities can also be caught, even if those
z
Market distortion - behaviour which is likely to be
instruments are not themselves traded on a regulated
regarded by a regular user of the market as a failure on
market.
the part of the person concerned to observe the
Continues on reverse
standard of behaviour reasonably expected of a person
z
Dealing with market rumour - companies will still be
in his position in relation to the market and which
able to take a ‘no comment’ approach to untrue rumours
either: (a) gives, or is likely to give, a regular user of the
about them. The guidance indicates that the knowledge
market a false or misleading impression as to the supply,
that a rumour is untrue is unlikely to amount to inside
demand, price or value of a qualifying or related
information so it would not be necessary to issue a
investment; or (b) would be, or would be likely to be,
denial; even if it did constitute inside information, the
regarded by a regular user of the market as behaviour
issuer would usually be able to delay disclosure, often
which would, or would be likely to, distort the market in
indefinitely. However, where press speculation or
that investment.
market rumour is ‘largely accurate’ an announcement
may well be required as the issuer will no longer be able
New Code of Market Conduct
to ensure the confidentiality of the inside information.
z
Sanctions - the FSA will, where appropriate, fine current
The FSA's Code of Market Conduct (the ‘Code’), which sets
and former directors whom it considers to have been
out guidance on what is and what is not market abuse, was
‘knowingly concerned’ in a breach by the issuer.
completely revised on 1 July 2005. The Code is important
because where the Code says that something will be market
New Insider Lists Requirement
abuse, that may act as evidence in support of FSA action but
will not be conclusive. If the Code describes something
Since 1 July 2005, an issuer with listed securities (or which
which it says is not market abuse, that will decide the
has made or approved an application for listing of its
matter.
securities) is required to maintain a list of its own
employees with access to inside information and a list of its
New Disclosure Requirement
principal contacts at any other firm or company acting for it
(for example lawyers or accountants) with whom it has
Since 1 July 2005, new disclosure rules for listed companies
direct contact and who also have access to inside
form part of a new section of the FSA Handbook to be
information about it. The FSA has recently clarified that the
known as the Disclosure Rules. Apart from some minor
issuer need not maintain a list of individuals working for
changes, the rules are in substantially the same form as
another firm or company where it has recorded the name of
those published in the joint FSA/HM Treasury consultation
the principal contact at that firm or company and made
paper on the new regime published in June 2004. The
effective contractual arrangements for that firm or company
following are some clarifications that have now been made
to maintain its own insider list and provide a copy to the
by the FSA to the overall requirement on listed companies
issuer upon request.
to disclose inside information as soon as possible:
New Senior Executive Trading Notification Requirement
z
z
If a Regulatory Information Service (RIS) is not open for
business - it is now clear that this in itself is not
Since 1 July 2005, not only the directors, but also the senior
sufficient grounds for delaying an announcement.
managers of an issuer company (with listed securities or for
Holding announcements - a short delay in making an
which the issuer has made or approved an application for listing
announcement is acceptable provided that a holding
of its securities) must notify their own transactions (and those
announcement is made if the issuer believes that there
of their close personal associates such as spouses and others
is a danger that inside information is likely to leak out
associated persons), in the shares of the issuer or in related
before the situation has been clarified. The holding
financial instruments. These notifications must be made public.
announcement should contain as much detail of the
A senior manager is defined as a senior executive who has
subject matter as possible, the reason why a full
regular access to inside information relating to the issuer and
announcement could not be made and an undertaking
has the power to make managerial decisions affecting the
to announce further details as soon as possible.
future development and business prospects of the issuer.
Continues on reverse
Reduced Stabilisation Safe-Harbour
z
If safe harbours have been relied upon in the past, their
continued availability should be ascertained.
In the context of stabilisation (the permitted practice of
z
buying securities in the market in the context of a public
Listed issuers must establish insider lists that satisfy the
new requirements.
offering in order to maintain confidence in the securities for
z
Listed issuers must ensure that the new disclosure rules
are followed.
a limited initial period, and other trading techniques with
equivalent price-supporting effect), the previous Price
z
Senior managers of a listed issuer must ensure that they
Stabilisation Rules have been wholly replaced from 1 July
notify their own and associates’ transactions in the
2005, to reflect new detailed stabilisation rules that apply
issuer’s shares.
across all of the Member States. The scope of permitted
z
FSA regulated firms must ensure that they report
suspicions of market abusive behaviour to the FSA.
ancillary stabilising activity in the context of primary or
secondary offerings of securities has been significantly
reduced. This has drastically reduced the scope for
This alert memorandum does not constitute legal advice.
financially lucrative trading transactions to be done under
For comprehensive assistance with your compliance with
the protection of the stabilisation safe harbour. In
the Directive, please contact any of the following Pinsent
particular, there is much less scope for ‘refreshing the
Masons financial regulatory partners listed below. We also
greenshoe’ - a practice whereby short positions are
offer training for directors and senior managers on corporate
repeatedly taken and closed out.
governance. For further details please contact one of our
financial regulatory partners:
Next Steps
Al-Harith Sinclair
All persons involved, directly or indirectly, with instruments
T: +44 (0)20 7418 7025
covered by the scope of the Directive (see the section
E: al-harith.sinclair@pinsentmasons.com
headed ‘New Scope of Market Abuse’ above) and all listed
issuers should review their practices and procedures for
Martin Webster
compliance with the new regime, for example:
T: +44 (0)20 7418 9598
E: martin.webster@pinsentmasons.com
z
z
Compliance manuals should be updated to reflect the
new laws and FSA rules.
Jeremy Phillips
Relevant staff should be trained on the new market
T: +44 (0)20 7418 7006
abuse rules.
E: jeremy.phillips@pinsentmasons.com
© Pinsent Masons 2005
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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