We refer throughout this note to "listed companies". Readers should note that the relevant rules will affect issuers of securities traded on a range of venues, including the main market and AIM.
Implementation: where are we now?
Listed companies should act now to familiarise themselves with the changes to the market abuse regime. The table on page 3 summarises the actions which they should be taking to ensure they are ready for 3 July.
That said, the devil will be in the detail and, with little more than four months to go, the finer details as to how the new regime will operate in practice are still not settled. The relevant technical standards have yet to be formally adopted and ESMA's guidelines on delaying disclosure and market soundings are still subject to consultation. While there will no doubt be changes to ESMA's proposals, it is expected that none of these will be of major substance. Of more concern is that the FCA's position with regard to certain areas of implementation, particularly with regard to share dealing rules, remains unclear. Its consultation on implementation of the new regime closed on 4 February and the final handbook provisions are expected in the spring.
Scope of the new regime
The new EU regime applies to a wider range of financial instruments admitted not only to regulated markets, but also to venues other than regulated markets (i.e. MTFs and, from 3 January 2018, OTFs1). The regulation applies to:
- financial instruments admitted to a regulated market in the EU or for which admission to a regulated market has been requested;
- financial instruments traded on an MTF, admitted to trading on an MTF or for which admission to an MTF has been requested;
- financial instruments traded on an OTF2; and
- other financial instruments, the price or value of which depends on or has an effect on the price or value of a financial instrument referred to in the points above, including, but not limited to, credit default swaps and contracts for difference.
Technical standards under EU MAR will impose detailed procedural requirements on issuers, some of which go beyond the existing requirements in the DTRs.
AIM companies
AIM is currently a "prescribed market" for the purposes of the market abuse regime. This means that behaviour in relation to AIM securities can already constitute market abuse. However, other rules which implement the current EU Market Abuse Directive and which apply to Main Market companies do not currently apply to AIM, such as:
- the obligation to keep insider lists, and the rules on disclosure of inside information, set out in the DTRs; and
- the rules on dealing by Persons Discharging Managerial Responsibility ("PDMRs") (essentially directors and senior managers).
EU MAR will now regulate these matters, for Main Market and AIM companies alike. AIM has announced that it intends to retain its Rule 11 on disclosure of price sensitive information alongside the EU MAR disclosure requirements, therefore making AIM companies answerable to both AIM Regulation and the FCA in this area.
It is possible that, subject to the satisfaction of certain criteria, AIM will look to apply for registration as an "SME growth market" under the MiFID II regime when it comes into force (now likely to happen in January 2018). Such registration would mean some limited relaxation of EU MAR's requirements for AIM-listed companies, most notably as regards the requirement for issuers to draw up insider lists. That said, AIM-listed companies would nonetheless be required to (a) ensure that insiders acknowledge their legal and regulatory duties and are aware of the sanctions for breach, and (b) provide an insider list to the competent authority on request. The technical standards in relation to this remain to be finalised and it is not yet clear how much of a concession this would turn out to be in practice. What is clear, however, is that, from 3 July 2016 and until such time as AIM is registered as an SME growth market, AIM companies will be subject to EU MAR in full.
Areas for action
The offences: insider dealing, unlawful disclosure and market manipulation
The current behaviours which constitute market abuse under the Financial Services and Markets Act 2000 will be replaced with a number of offences in EU MAR under three broad heads: insider dealing, unlawful disclosure and market manipulation. Although the principal elements of the behaviours covered have not changed, the new regime broadens the scope of the proscribed behaviours and introduces procedural requirements intended to facilitate prevention and detection of those behaviours within organisations.
Inside information and disclosure
The definition of inside information is broadly unchanged. However, companies will need to be familiar with EU MAR in order to comply with its new provisions on management of inside information. These provisions apply to issuers who have requested or approved admission of their financial instruments to trading on a regulated market or MTF, or (from a future date, likely to be 3 January 2018) have approved trading of their financial instruments on an OTF. The principal changes are as follows.
Delaying Disclosure of inside information
As under the current regime, listed companies will be allowed to delay the disclosure of inside information in order to protect their "legitimate interests", so long as confidentiality can be maintained and the public is not misled.
ESMA has recently published for consultation guidelines on circumstances which will give rise to "legitimate interests" which may be protected by delaying disclosure of inside information, and situations in which delay in disclosure may mislead the public (see our recent briefing: When can issuers delay disclosure of inside information?). There are concerns about inconsistencies between these guidelines and UK market practice. It is hoped that the FCA may give some guidance as to the application of the new rules in the UK.
EU MAR imposes a requirement on an issuer to notify its competent authority when disclosure has been delayed, and to provide an explanation of how the conditions for the delay were met. However, alternatively, it allows Member States to provide that a record of such explanation need only be provided to the competent authority on request. The FCA has indicated that this is likely to take this alternative approach but emphasised that the issuer will be required to routinely notify the FCA of the fact of its decision to delay. ESMA has published draft technical standards which set out the prescribed content of the notification, including the date and time of the decision to delay disclosure, and the identity of all persons with responsibilities for the decision to delay. The draft technical standards also set out the detailed internal records which must be kept when disclosure is delayed.
Generally, these new provisions will require issuers to revisit the basis on which they make decisions to delay disclosure of inside information and maintain records of their decision-making with reference to the relevant technical standards, ESMA's guidelines and any FCA commentary on the topic. Care will need to be taken with the timing of trading results and M&A transactions in particular.
Insider Lists
Under EU MAR, companies will need to maintain "insider lists" giving details of persons with access to inside information. Whilst a similar regime already exists for listed companies, the requirement will, under EU MAR, also apply to AIM companies.
EU MAR, and the implementing technical standards which set out the detailed requirements for insider lists, require detailed personal information on every insider to be included, including professional and personal telephone numbers, home address and former surnames.
There are other requirements for insider lists which are more onerous under EU MAR than the current regime. In particular, the insider list must contain both the date and time on which each insider obtained and ceased to have access to inside information. The issuer or other person drawing up an insider list is responsible for taking all reasonable steps to ensure that all insiders acknowledge in writing their legal and regulatory duties and that they are aware of the sanctions for insider dealing and unlawful disclosure.
ESMA has produced a mandatory standard template for insider lists. The FCA and other financial regulators will be required to publish on their websites the means by which insider lists should be submitted electronically to them. Issuers should monitor the FCA's website for further details.
PDMR transactions and the model code
EU MAR will also bring changes to the rules on disclosure of directors' and senior managers' dealings, and the restrictions on dealings currently set out in the Model Code. The new provisions apply to issuers who have requested or approved admission of their financial instruments to trading on a regulated market or MTF, or (from a future date, likely to be 3 January 2018) have approved trading of their financial instruments on an OTF.
The FCA proposes to delete the Model Code as it conflicts with the wording of EU MAR. It has produced a draft Annex to Listing Rule 9 which is intended have the status of guidance (see below). Similarly, the provisions on the disclosure of PDMR dealings in the Disclosure and Transparency Rules have largely been deleted, and retained provisions re-characterised as guidance.
The principal differences between EU MAR and the existing rules as to directors and senior managers' dealing disclosures and the Model Code include the following:
The FCA's draft guidance (currently under consultation) states that companies should have "effective systems and controls" in place regarding the process for directors and senior managers to deal in the securities of the company. It also says that companies should give due consideration to whether it would be "appropriate" to give clearance to deal when, for example, there existed inside information in relation to the company or at other times in the year where it may not be appropriate for them to deal due to the perception that inside information may exist. This may indicate an FCA preference that issuers revert to the previous 60 day period, but FCA guidance is lacking.
There is a view (which we share) that the FCA's proposed guidance is not clear enough and that the FCA should clarify its expectations in regard to clearance of dealings outside of EU MAR closed periods. In the absence of further clarity in this area, the concern is that there will be huge inconsistencies as to the "effective systems and controls" purported to be put in place.
Market surroundings
EU MAR contains detailed new requirements on "market soundings". These new rules make major changes in the context of communications with potential investors and are likely to have a significant impact on market practice in respect of investor meetings and roadshows.
A market sounding need not include inside information and comprises:
- the communication of information, prior to the announcement of a primary or secondary offer, by the issuer or secondary offeror (or a third party acting on its behalf) (a "Disclosing Market Participant" or "DMP"), in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it, such as its potential size or pricing; or
- the communication of information in certain circumstances by a person intending to make a takeover bid or undertake a merger.
The provisions of EU MAR governing market soundings give a "defence" to DMPs against unlawful disclosure of inside information, but only if a number of detailed requirements are satisfied. These requirements are set out in detailed ESMA technical standards and include the following:
- a standard set of information that must be included in communications with the recipient of a market sounding (a "Market Sounding Recipient" or "MSR"), including whether or not the information being provided amounts to inside information, and the MSR's obligations in respect of the information, that the market sounding is being recorded (if applicable), estimating when any inside information that is to be communicated will cease to be inside information, and seeking consent from the MSR to proceeding with the relevant sounding;
- recording data in relation to natural persons within MSRs who receive information during the course of a sounding;
- notifying MSRs when any inside information communicated during a sounding ceases to be inside information; and
- detailed record keeping requirements, including the requirement to maintain written minutes or notes of any soundings taking place via unrecorded meetings or telephone conversations and to agree such minutes with the relevant MSR, or otherwise to keep a copy of the MSR's written minutes of the sounding with the DMP's own minutes.
Companies will need to put in place procedures to comply with these requirements in the context of investor meetings and roadshows. They will also want to understand that any brokers making soundings on their behalf are EU MAR compliant.
EU MAR also imposes requirements on MSRs including:
- making their own, independent assessment of whether information received is inside information;
- agreeing written minutes of market soundings with the DMP;
- maintaining lists of persons in possession of inside information following a market sounding; and
- establishing internal procedures to control the flow of inside information.
These provisions are onerous, particularly for MSRs who are not institutional asset managers, so it is conceivable that some MSRs may shy away from receiving market soundings. For further information on the requirements on MSRs in the context of asset managers please see our briefing: EU MAR and asset managers: guidelines for persons receiving market soundings.
Further articles on EU MAR
For more information on the EU Market Abuse Regulation, please see the following publications:
EU Market Abuse Regulation and Asset Managers - six months to go
When can issuers delay disclosure of inside information?
EU Market Abuse Regulation and Asset Managers - guidelines for persons receiving market soundings
This memorandum is necessarily only a summary of the incoming EU MAR regime. It should not be taken as a substitute for bespoke advice. We are happy to provide more detailed guidance for clients upon request.
