19 June 2015
EU Market Abuse Regulation will apply from July 2016 and affects a wider range of markets and firms than current rules
New EU regulation will replace existing rules on listed companies’ disclosure obligations, share dealing codes, directors’ dealing disclosures and insider lists in 2016. The Market Abuse Regulation (MAR) will also mean changes to the rules on insider dealing and market manipulation and will apply to markets not previously subject to the EU market abuse rules.
MAR will apply automatically across all EU member states, including the UK, from 3 July 2016. It will be supplemented by further rules, which are being worked on by the European Securities and Markets Authority (ESMA). These rules will set out some of the more detailed technical provisions, such as the template to be used by persons discharging managerial responsibilities (PDMRs) to notify their dealings to the market.
There will also be changes to UK rules to reflect the new regime, including the Financial Services and Markets Act 2000, the AIM Rules, the Disclosure and Transparency Rules and the Model Code. We expect consultations on these changes to be published this summer.
A casual reader of MAR might think that not much is changing; the new rules bear more than a passing resemblance to the existing ones, especially for main market companies. It is true that we do not expect MAR to result in a significant shift in culture or behaviour.
There are however a number of changes in the procedures and processes that companies have to comply with. This means that internal systems and controls will need to be reviewed and updated, many of which fall within the ambit of the compliance or company secretarial functions. There is no need to wait until next year to start this process, you can start to plan now. Budget, allocate responsibility and put together a project plan to include:
This will help prepare your company for a smooth transition when the new regime kicks in next year.
For companies quoted on AIM the changes will be more significant. We expect that AIM and other growth markets will seek to register with the Financial Conduct Authority (FCA) as ‘SME growth markets’, which will enable companies quoted on those venues to benefit from a small number of exemptions in MAR. Otherwise, AIM companies will become more or less subject to the same standards as main market companies. This inevitably means more work for compliance officers and company secretaries in AIM companies, as they will have a greater number of changes to grapple with.
As of now, an issuer must disclose inside information that directly concerns it to the market as soon as possible. Disclosure can be delayed in certain limited circumstances where it would prejudice the issuer’s legitimate interests (for example, in ongoing negotiations), as long as the confidentiality of the information can be preserved and the market is
It is an offence to use inside information to deal or attempt to deal or to encourage another to deal in securities. It is also an offence to disclose inside information outside the normal exercise of one’s employment, profession or duties.
Inside information is of a precise nature, relating directly or indirectly to an issuer or securities, which is not generally available and which would be likely to have a significant effect on price if it was made available. Therefore, if a reasonable investor could use it as part of the basis of his investment decisions, it would be likely to have a significant effect on price.
A new requirement is that an issuer must notify the FCA if it has delayed disclosure of inside information. This has to be done after the information has been announced. Companies will need procedures in place to be sure they can explain to the FCA when the inside information arose and how the conditions for delaying disclosure to the market were satisfied.
There will be new rules on the mechanics for disclosing inside information. For example, issuers will be expected to have a specific RSS feed for the disclosure of inside information.
Inside information must be kept on an issuer’s website for five years under MAR – under current regulations the requirement is just one year. For SME growth market issuers, it may be possible to post the inside information on the trading venue’s website instead.
There will be new procedures for disclosure of inside information as part of ‘market soundings’ (communications to potential investors before announcement of a transaction). Strict procedures must be followed to avoid committing the offence of improper disclosure cannot be committed.
Issuers and persons acting on their behalf must maintain records of all persons working for them with access to inside information. The insider list must be updated promptly after certain events happen. There is an exemption for issuers with securities trading on an SME growth market, in which case they just have to be able to provide an insider list upon request by the FCA.
A new feature is that issuers (including those quoted on an SME growth market) and persons acting on their behalf must take all reasonable steps to ensure that any person on the insider list acknowledges, in writing, the legal and regulatory duties entailed. They should also ensure awareness of the sanctions applicable to insider dealing and unlawful disclosure of inside information. Companies may have existing procedures for this, but should check that they are adequate.
The format of the insider lists will be different: the latest consultation suggests that a lot more data will need to be recorded on each insider, including national identification number; business and personal phone numbers; and email addresses. Companies will need to have procedures in place to collect all the information required.
Persons discharging managerial responsibilities (PDMRs) and persons closely associated with them must notify the FCA, as well as the issuer, of any dealings in securities of the company. Issuers are obliged to notify the market of such dealings. No dealings can be made during closed periods, except in very limited circumstances.
Although the rules in MAR are broadly similar to the existing UK regime, there are a number of differences, which will have an impact in practice and need to be communicated to PDMRs. On the whole, the new rules will be stricter with more types of dealing restricted and narrower exceptions. Some kinds of dealing that would currently be permitted during a closed period under the Model Code will not be permitted under MAR, such as a transfer between spouses. Currently PDMRs have four business days to notify the issuer and the issuer must then notify the market by the next business day. Under MAR, both of these notifications must be made within three business days of the dealing.
Another new feature is that PDMR transactions below a certain amount do not have to be disclosed to the market. The threshold in MAR is €5,000 per year but the FCA may increase it to €20,000.
Issuers must notify PDMRs of their obligations in writing and draw up a list of PDMRs and persons associated with them. PDMRs must notify their associated persons in writing of their obligations and keep a copy of such notification.
Share buybacks will not be market abuse if they are announced and comply with certain price and volume limits. A new safe harbour for share buybacks will exist under MAR, with slight differences from the existing one. Companies with ongoing long-term share buyback programmes which benefit from the current safe harbour will need to check that the programme will continue to fall within the safe harbour under MAR.
There will continue to be offences of manipulating transactions, manipulating devices and misleading dissemination. There will be new offences of transmitting false or misleading information in relation to benchmarks and attempting to engage in market manipulation. MAR also extends the scope of the market manipulation offences to different types of instrument. For companies, the main impact of the market manipulation offences moving to the new regime will be a need to update any market abuse manuals and training to reflect the new rules.
Lucy Fergusson is a partner and Lucy Reeve is a senior associate at Linklaters LLP