July 2016 will see the entry into force in member states across the EU of Regulation (EU) No 596/2014, the so-called Market Abuse Regulation or MAR to replace the outgoing Market Abuse Directive. As set out in its recital (5), MAR removes a number of “divergences between national laws”. The EU legislator found it necessary to “adopt a Regulation establishing a more uniform interpretation of the Union market abuse framework, which more clearly defines rules applicable in all Member States.”

By Thomas Werlen / Matthias Wühler (Reference: CapLaw-2016-26)

1) The regulation of financial markets in the EU

An awareness of the peculiar nature of the EU’s multilevel system of governance is essential for a full grasp how EU law has evolved to regulate any given sector of the economy, and capital markets are no exception.

The balancing of power along the vertical plane between the European Union and its Member States is less of a concern in those areas of law that, like financial market regulation, are of manifest and paramount relevance to the functioning of the internal market. Still, the vertical delineation of competence retains significance in the area of capital market regulation, both in terms of enforcement and in terms of legislation. It explains why the criminal sanctions triggered by market abuse are not set out in MAR but in an accompanying directive.

In addition to the vertical dimension, there is a “horizontal” dimension. In the capital markets context, this is primarily to say that law-making powers within the EU are spread across the legislative and executive bodies in a complex chain of delegation(s). To set out the full spectrum of statutory provisions, delegated rules, guidance and other forms of soft law that inform the activity of issuers and other market participants is beyond the scope of this brief contribution. We shall limit ourselves to MAR as the new cornerstone of the “Union market abuse framework” and will only explore some of its more prominent features.

2) Topics covered

In illustrating some of the key features of MAR, we shall discuss in turn: MAR’s scope of application, the notion of inside information, ongoing disclosure obligations (ad-hoc publicity), insider dealing, directors’ dealings / managers’ dealings and the prohibition of market manipulation. We will not discuss the new sanctions regime. Suffice it to note here that MAR will come into force jointly with Directive 2014/57/EU on criminal sanctions for market abuse (“CSMAD”) which for the first time provides for minimum harmonisation of criminal liability for market abuse and that MAD provides for much more severe regulatory sanctions with substantial fines and mandatory naming and shaming by the regulator in case of violations.

3) Scope of application

MAR will extend the full spectrum of market abuse regulation (i.e. the rules on market manipulation and insider law) to issuers of securities traded on a multilateral trading facility (“MTF”), admitted to trading on an MTF or for which a request for admission to trading on an MTF has been made, article 2 (1) (b), and to issuers of financial instruments traded on an organised trading facility (“OTF”), article 2 (1) (c).

MAR thereby mirrors the three types of trading venues foreseen in the Markets in Financial Instruments Directive (“MiFID”), namely the regulated market (“RM”) and the aforementioned MTF and OTF and extends the import of market abuse regulation to cover all three. This is a substantial change for issuers of securities traded on the open market segments as well as their directors, not least in light of MAR’s stricter rules on directors’ dealings and the tougher sanctions regime (it also raises delicate issues of extraterritoriality).

4) The notion of inside information

Article 7 defines the notion of inside information. Already that base definition is notably more convoluted than its Swiss counterpart in article 2 (j.) Financial Market Infrastructure Act (“FMIA” or “FinfraG”). Whereas FinfraG defines inside information as

confidential information the disclosure of which would significantly affect the prices of securities admitted to trading on a Swiss trading venue,

article 7 (1) a) MAR explicates that for the purposes of MAR, inside information shall comprise

information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to 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.

As evidenced in the reasoning of the CJEU’s decision in Lafonta v AMF, what really matters is conceptual clarity. Whether one then opts for a comprehensive definition or more abstract terminology is of secondary importance.

The ECJ’s reasoning in Geltl v Daimler is reflected in article 7 (2) 2 and (3) MAR which expand the base definition of inside information in respect of a so-called protracted process and intermediate steps in a protracted process.

2. (…) In this respect in the case of a protracted process that is intended to bring about, or that results in, particular circumstances or a particular event, those future circumstances or that future event, and also the intermediate steps of that process which are connected with bringing about or resulting in those future circumstances or that future event, may be deemed to be precise information.

3. Any intermediate step in a protracted process shall be deemed to be inside information if, by itself, it satisfies the criteria of inside information as referred to in this article.

MAR follows a one step approach where the notion of inside information underlying disclosure obligations is identical to the definition of inside information delineating the rules on insider dealing. An alternative would have been a functional definition of inside information depending on the context (disclosure obligations incumbent on the issuer on the one had, the rules on insider trading on the other, with the latter resting on a broader definition of inside information), see the Commission’s Proposal (COM(2011) 651 final, recital 14).

5) Public disclosure of inside information

A notable change in MAR versus MAD is found in article 17 (4), which provides that

Where an issuer (…) has delayed the disclosure of inside information (…), it shall inform the competent authority (…) that disclosure of the information was delayed and shall provide a written explanation (…).

Delayed disclosure of inside information is of great practical relevance. Prior to MAR, there were discrepancies in the secondary market regulation of EU member states on whether issuers that (temporarily) exempted themselves from their disclosure obligation(s) had to report to the supervisory authority (cf. CESR/09-1120, p. 40 et seq.). MAR removes the legislative discretion that was previously available under MAD.

Under article 17 (4) MAR, the issuer is permitted to delay disclosure without the need for the supervisory authority to consent (whether the governing bodies of the issuer must take an express decision to delay disclosure remains unanswered by the text of the regulation). Article 17 (5) is a novel and somewhat different exception from the obligation to disclose, without undue delay, material non-public information that relates to the issuer. Under this provision, financial intermediaries may, subject to the supervisor’s consent, withhold inside information the disclosure of which would endanger the stability of the financial system.

6) Insider dealing, unlawful disclosure of inside information, market soundings

Article 8, 14 (a) MAR set out the prohibition against insider dealing. Article 8 (1) 2 MAR is a change over MAD in that it expressly prohibits the cancellation of an order placed in good faith:

The use of inside information by cancelling or amending an order concerning a financial instrument to which the information relates where the order was placed before the person concerned possessed the inside information, shall also be considered to be insider dealing.

Recital 25 provides additional context:

Orders placed before a person possesses inside information should not be deemed to be insider dealing. However, where a person comes into possession of inside information, there should be a presumption that any subsequent change relating that information to orders placed before possession of such information, including the cancellation or amendment of an order, or an attempt to cancel or amend an order, constitutes insider dealing. (…).

This novel provision can be relevant especially in the context of a stakebuilding process where the acquirer learns of material non-public information at the target company.

Also new is the explicit list of activities constituting legitimate behaviour set out in article 9 MAR. This provision comes against the background of the ECJ’s decision in Spector Photo Group. The ECJ established a presumption to the effect that a primary insider trading in the financial instruments to which the inside information relates did so illegally. However, the ECJ also noted that certain sets of facts should be exempted from such a presumption, and article 9 MAR elevates these judicial considerations to the level of statutory exceptions. Article 9 (6) clarifies that article 9, although setting out exceptions from the presumption of insider dealing, is not to be misunderstood as a complete carveout or rather a safe harbour.

Article 10, 14 (c) MAR stipulate the prohibition against unlawful disclosure of inside information. MAD was silent on the disclosure of inside information occurring in the context of market soundings, and MAR now features an explicit and detailed provision in its article 11. Where its conditions are met, article 11, unlike article 9, provides a safe harbour and shields market soundings from liability under MAR. The underlying considerations are summarized in recitals 32 and 34:

Market soundings (…) are a highly valuable tool to gauge the interest of potential investors, enhance shareholder dialogue, ensure that deals run smoothly, and that the views of issuers, existing shareholders and potential new investors are aligned. They may be particularly beneficial when markets lack confidence or a relevant benchmark, or are volatile. Thus the ability to conduct market soundings is important for the proper functioning of financial markets and market soundings should not in themselves be regarded as market abuse.

Conducting market soundings may require disclosure to potential investors of inside information. (…) Before engaging in a market sounding, the disclosing market participant should assess whether that market sounding will involve the disclosure of inside information.

Issuers and persons acting on their behalf in the context of a market sounding are referred to as disclosing market participants. Article 11 (3) requires that any disclosing market participant,

prior to conducting a market sounding, specifically consider whether the market sounding will involve the disclosure of inside information. The disclosing market participant shall make a written record of its conclusion and the reasons therefore.

Thus, even where a piece of information is ultimately deemed not to constitute inside information, the reasoning leading to this conclusion must still be kept in the written record. Detailed obligations vis-à-vis the receiving party and relating to the disclosure of information as well as accompanying record-keeping obligations are set out in article 11 (5).

7) Directors’ dealings / managers’ dealings

The rules on managers’ transactions (article 19) are substantially tougher than under MAD. The rules apply to persons discharging managerial responsibilities (“PDMR”) and persons closely associated with them. The rules on managers’ transactions now cover shares as well as debt instruments (article 19 (1) (a)). Notably, transactions that must be notified now also include the pledging or lending of such instruments (article 19 (7) (a)) as well as transactions undertaken by asset managers (article 19 (7) (b)), including where discretion is exercised by said asset manager, and transactions made under a life insurance policy (article 19 (7) (c)).

In article 19 (11), MAR now provides for closed periods, i.e. a complete ban of any relevant transaction during a period of 30 calendar days before the announcement of an interim financial report or a year-end report. Exceptions may be granted, but only under restrictive conditions. The practical consequence is that for issuers with high frequency period disclosure obligations, an even stricter regime on managers’ dealings will apply for extended periods of the year.

8) Prohibition of market manipulation

MAR extends the prohibition against market manipulation to capture attempted manipulation. Another revision is the inclusion of benchmark manipulation, with recital 44 making clear that this revision was inspired by recent events:

Many financial instruments are priced by reference to benchmarks. The actual or attempted manipulation of benchmarks, including interbank offer rates, can have a serious impact on market confidence and may result in significant losses to investors or distort the real economy. Therefore, specific provisions in relation to benchmarks are required in order to preserve the integrity of the markets and ensure that competent authorities can enforce a clear prohibition of the manipulation of benchmarks. Those provisions should cover all published benchmarks including those accessible through the internet whether free of charge or not such as CDS benchmarks and indices of indices.

MAR is silent (as was MAD) on one of the most interesting doctrinal questions, namely whether market participants can seek redress in civil litigation for losses resulting from market manipulation, i.e. the question of private enforcement. Most arguments in favour of private enforcement de lege lata will come under the rubric of the so-called effet utile, a rule of interpretation often invoked to broaden the import of European Union law.

9) Private enforcement of secondary market regulation

Taking a broader view, the real question is whether MAR should have explicitly provided for private enforcement. In this respect, the legal thinking in most if not all EU member states is likely to continue to deviate from the approach in more plaintiff-friendly jurisdictions for the foreseeable future, with private enforcement in a secondary market context constituting a narrow exception rather than the norm.

The efficient litigation of mass torts (and by extension, the incentive effect on issuers emanating from private enforcement) depends as much on the rules governing civil proceedings as it presupposes strong causes of action in the substantive rules. Thus, even where the law provides for private causes of action, the civil procedure codes of EU member states are not always adequate to ensure the efficient litigation of mass claims. In the wake of the Supreme Court’s decision in Morrison v. National Australia Bank, some of the smaller EU member states have tried to capitalize on the declining attractiveness of the Unites States as a forum for claims against non-US issuers. In practice, however, their novel tools are best put to work in a consensual context; they do not substantially enhance the resolution of mass securities claims in a truly litigious context.

10) Conclusion

MAR is an important step forward in the harmonization of capital market law in the EU. MAR provides important updates to account for changed market practices since the enactment of MAD (such as the proliferation of new trading venues and the spread of new technologies). MAR also contains new rules (such as the duty to notify the supervisor about a decision to delay the disclosure of inside information, the compliance requirements to benefit from the market sounding safe harbour and closed periods for managers’ transactions) to which issuers will need to adapt. In sum, it is fair to say that MAR will likely enhance the Union market abuse framework and have a positive impact on market integrity.

Thomas Werlen (thomaswerlen@quinnemanuel.swiss)
Matthias Wühler (matthiaswuehler@quinnemanuel.com)