One of the key changes of the new Swiss laws on market abuse that entered into force on 1 May 2013 was the introduction of administrative law rules on insider trading and market manipulation which apply to all market participants. As a result thereof, Swiss publicly listed companies should, among other things, revisit their current internal trading regulations with a focus on cooling-off periods following the publication of price sensitive information to avoid any potential implications and/or allegations that market activities taken by the company or its directors, employees, affi liates, etc. are a form of market abuse.

By Philippe Weber/Christina Del Vecchio (Reference: CapLaw-2014-11)

1) Introduction

On 1 May 2013, new Swiss rules on insider dealing and market manipulation, embodied in the revised Stock Exchange Act (SESTA) and the amended implementing Stock Exchange Ordinance of the Swiss Federal Council (SESTO), entered into force.

One of the key changes of the new laws was the introduction of new administrative law rules on market abuse (articles 33e and 33f SESTA), which are enforced by the Swiss Financial Market Supervisory Authority (FINMA) and apply to all market participants (i.e., not only FINMA regulated entities).

The new administrative law regime prohibits all natural persons and legal entities from engaging in insider dealing and market manipulation. Prior to this, FINMA could only enforce market conduct rules against certain supervised market participants. Moreover, the administrative law rules apply irrespective of any intent and financial benefit on the part of any relevant person and thereby materially differ from insider dealing and market manipulation rules under criminal law.

As a result of these new rules, Swiss publicly listed companies should, among other things, revisit their current internal trading regulations with a focus on cooling-off periods following the publication of price sensitive information. By cooling-off period we mean the period during which trading in relevant securities remains prohibited after the publication of price sensitive information under the trading regulations of the publicly listed company. Indeed, in the past when drafting trading regulations companies typically focused on the prevention of criminal insider dealing and repetitional matters (e.g., by adopting closed periods prior to publication of half-year and year-end financial results). However, under the new market abuse rules the situation has become more complex. In this context, appropriate cooling-off periods constitute an important compliance measure to avoid any potential implications and/or allegations that market activities taken by the company or its directors, employees, affiliates, etc. following the publication of price sensitive information are a form of market abuse.

2) Unlawful dealing with inside information and market manipulation rules

a) Unlawful dealing with inside information

Administrative law: According to article 33e SESTA, any person who knows or should know that information constitutes inside information acts unlawful (and can be sanctioned pursuant to applicable administrative law rules, including through the issuance of a declaratory decision, publication of such decision (“naming and shaming”) and confiscation of unlawful profi ts) if it (a) exploits such information to acquire or dispose of securities admitted for trading on a stock exchange or on a similar platform in Switzerland or if it uses financial instruments derived from such securities; (b) communicates such information to another person; or (c) exploits such information to make a recommendation to another person to acquire, dispose of or use financial instruments regarding any securities covered by (a).

Criminal law: In order to act unlawful under criminal law (i.e., art. 40 SESTA), the offender must additionally obtain (or at least attempt to obtain) for itself or for another person a financial advantage. Sanctions under criminal law vary from fines to up to five years of imprisonment, primarily depending on the type of offender (i.e., whether the offender is an officer of, or otherwise in a qualifi ed relationship with, the issuer, or only a tippee or accidental insider) and the amount of financial advantage.

In both instances, “inside information” means any confi dential information which, if made public, would be likely to have a significant effect on the price of securities admitted for trading on a stock exchange or on platforms which are similar to stock exchanges (börsenähnliche Einrichtung) in Switzerland.

b) Market manipulation

Administrative law: According to article 33f SESTA, any person acts unlawful if it (a) publicly disseminates information of which such person knows or should know that this will send a false or misleading signal in relation to the offer, demand or price of securities admitted for trading on a stock exchange or on a similar platform in Switzerland; or (b) carries out any transactions or executes buy or sales orders of which such person knows or should know that this will send a false or misleading signal in relation to the offer, demand or price of securities admitted for trading on a stock exchange or on a similar platform in Switzerland.

Criminal law: According to article 40a(1) SESTA, any person will be punished with up to three years of prison or with a fine, who, with the aim to signifi cantly influence the price of securities admitted for trading on a stock exchange or on a similar platform in Switzerland and, thereby, achieve a financial advantage for itself or another person, (a) against better judgment disseminates wrong or misleading information; or (b) effects sales and purchases of securities, which on both sides directly or indirectly are made for the account of the same person or persons that are affiliated for such purpose.

As a result of the new rules on market manipulation, companies must be careful when dealing with its own securities (or permitting its directors, employees, affi liates, etc. to deal with securities of the issuer) in order not to be deemed as sending a false or misleading signal in relation to the offer, demand or price of its securities. For example, under the new rules, stabilization is only permitted in exceptional cases and other activities, such as capping, ramping, cornering, marking the close or spoofi ng, are prohibited. By contrast, market making (with the purpose of providing liquidity on buy- and sell-side and narrowing the range between bid and ask price) is permitted, but in practice there exists only a thin line between permitted market making on the one hand and prohibited stabilization on the other hand.

In this context, and as further discussed below, the use of cooling-off periods following the publication of price sensitive information is a means to restrict dealing with own securities while price-sensitive information is still being absorbed by the market, thereby insulating the issuer, its directors, employees, affi liates, etc. from potential market manipulation liability.

c) FINMA Circular 2013/8

In connection with the new market abuse rules under the SESTA and SESTO, FINMA has published a completely revised version of its circular on market behavior rules which entered into force on 1 October 2013 (FINMA Circular). In line with the extended scope of the administrative law rules on insider dealing and market manipulation, the FINMA Circular also applies to non-FINMA supervised market participants.

The FINMA Circular provides certain guidance on the interpretation of the new administrative law market abuse rules, including a non-exhaustive list of behaviors that would and would not be considered a violation of 33f SESTA.

3) Market Reception of Potentially Price-Sensitive Information

a) Ad-hoc Disclosure Requirements

Under the listing rules of SIX Swiss Exchange (SIX and SIX Listing Rules, respectively), companies listed on SIX have an ongoing obligation to report potentially price-sensitive facts unknown to the public in connection with the business activities of the listed company. Such information includes new facts which are likely to result in significant movements in the price of securities and should be made available to all actual and potential market participants on a non-discriminatory basis to ensure transparency and equal treatment for all investors. To the extent possible, media releases should be published before 7:30 a.m. or after 5:30 p.m. (i.e., 90 minutes before the start of trading or after the close of trading). If media releases need to be published during trading hours, SIX Listing Rules require submission of such media releases to SIX Exchange Regulation 90 minutes ahead of their release. Depending on the nature of the release, SIX may decide to suspend trading of the company’s shares during market reception of the material information. Implicit in the SIX’s ad-hoc disclosure policy, the 90 minute window ahead of the opening of trading should arguably give recipients sufficient time to acquire, read and interpret the information or, depending on the nature of the release, the SIX may artifi cially create a period of time for market recipients to acquire, read and interpret the information through suspension in trading. To ensure nondiscriminatory distribution, media releases must be provided to SIX Exchange Regulation, via at least two electronic information systems widely used by professional market participants, at least two Swiss newspapers of national importance and to all interested parties upon request (i.e., through a push and pull system).

b) Digestion of Price-Sensitive Information

While the SIX Listing Rules strive to ensure that investors and all other interested parties receive price sensitive information within suffi cient periods of time to acquire, read and interpret such information, it remains debatable as to when such information is priced-in to the actual shares of the company. Prior to the opening of trading, the SIX Listing Rules provide the market with 90 minutes to review, digest and price-in this information or, depending on the nature of the release, the SIX may artifi cially create a period of time for market recipients to acquire, read and interpret the information through suspension in trading. In contrast, though, certain studies have indicated that the Swiss market is rather slow in reacting to price sensitive information and, thus, may require, for example, more than 90 minutes ahead of the opening of trading to review, digest and price-in new information.

Generally, the time for the market to digest and price-in material information can understandably vary depending not only on the nature of the information, but also on other factors, such as the liquidity of the company’s shares or the extent to which analysts and industry commenters follow the company. For example, a company’s financial results will naturally take longer to be absorbed and refl ected in trading prices as compared to the announcement of board or executive management resignations.

As discussed further below, in light of the expanded scope of the rules relating to market abuse, companies should, therefore, consider not solely relying on the SIX Listing Rules when designing their cooling-off periods within their internal trading regulations, but also take into consideration when the market has had suffi cient opportunity to price-in the information.

Furthermore, it should be noted that the FINMA Circular does not provide specific guidance on appropriate cooling-off periods following the publication of price sensitive information.

c) Potential Violations of the New Swiss Rules Market Abuse

Under both the administrative and criminal law provisions, insider trading violations (articles 33e and 40 SESTA) are premised on individuals acting on the basis of non-public information. Established Swiss Federal Supreme Court precedent has indicated that once the information is public, the requisite element for the violation of insider dealing/trading under criminal law (i.e., acting on non-public information) falls away. Consequently, where an issuer has published price sensitive information in accordance with the SIX Listing Rules, trading following such disclosure should not constitute insider dealing/trading under criminal law or administrative law. Nevertheless, from an insider dealing perspective the more prudent approach is to avoid any appearance of improper use of inside information through the implementation of adequate cooling-off periods.

However, under the new administrative law rules relating to market manipulation, companies are advised to consider the potential exposure that dealing with own securities can present while the market is still absorbing newly published price sensitive information. Indeed, such dealings may be deemed as sending a false or misleading signal in relation to the offer, demand or price of its securities. In particular, under the new market abuse rules, stabilization is only permitted in exceptional cases and other activities, such as capping, ramping, cornering, marking the close or spoofi ng, are prohibited. Delays by the market in absorbing and pricing-in material information, therefore, create a tension between the new administrative law prohibiting market manipulation by any market participant and trading activities of a company’s directors, employees, affiliates, etc. in the market following the publication of price sensitive information. Hence, in evaluating and re-designing internal trading regulations, including cooling-off periods, the new Swiss administrative rules on market manipulation provisions are of specific relevance and should be considered carefully.

4) Cooling-off periods

The expanded scope of liability embodied in the new Swiss rules on market abuse extending to all market participants pose rather diffi cult questions for listed companies when reviewing and reconsidering their company trading regulations. According to the SIX Listing Rules and established Swiss Federal Supreme Court precedent, once material information has been made public potential insider trading liability, both in the administrative and criminal law context, are removed. Furthermore, the criminal law provision of market price manipulation is limited to simulated transactions. However, the administrative law violations of market manipulation, which applies to all market participants, leaves FINMA with considerable discretion for what types of activities could be considered a violation of article 33f SESTA. This is further complicated by the difficulty in assessing when information has been adequately absorbed and priced-in by the market, thus insulating trading activities by company directors, employees, affiliates, etc. from potential liability.

Since neither article 33f SESTA nor the FINMA Circular provide any legal guidance or safe harbors relating to cooling-off periods, the most practicable route is to include a general cooling-off period in the trading regulations of a publicly listed company which can be considered sufficiently long to enable the market to absorb new price sensitive information following its publication. In our view, a cooling-off period of one full trading day should be sufficient for such purpose. A more tailored solution could be to stipulate as a general rule a one day cooling-off period and grant the person responsible for implementing the trading regulations (for example, the general counsel) the authority to approve, at his discretion, shorter or impose longer cooling-off periods in exceptional circumstances. In determining whether to shorten or extend cooling-off periods, such individual could consider the (i) particular nature of the new information being disseminated to the market (e.g., departure of the member of the executive management responsible for HR versus a large and highly complex restructuring), (ii) liquidity of the company’s shares or (iii) attention paid by analysts and industry commentators to the company’s business activities. Through a more tailored and focused approach to a publicly listed company’s cooling-off period, companies are more likely to avoid repetitional issues and any potential allegations of or liability for market manipulation of both itself and company directors, employees, affi liates, etc. who engage in trading following the publication of price sensitive information. Nevertheless, it remains the view of the authors that a cooling-off period of one full trading day should suffi ce in any event.

5) Conclusion

In general, it is good practice for publicly listed companies to issue trading regulations in order to prevent insider dealing and market manipulation. These regulations should provide for appropriate cooling-off periods, meaning a period during which trading in relevant securities remains prohibited after publication of price sensitive information by the issuer. To facilitate more tailored solutions, company trading regulations may additionally provide the responsible person for enforcing trading regulations with the additional authority to approve shorter or impose a longer cooling-off periods in exceptional circumstances.