On 3 July 2016, both the Market Abuse Regulation (MAR) and the Criminal Sanctions (Market Abuse) Directive (CSMAD) came into application introducing a new market abuse regime across Europe. This new legal framework (MAD II) replaced MAD as it had become somewhat outdated and unsuitable for the increasingly global nature of financial markets and to adapt to new technology. Together the framework aims to create a stronger market abuse regulatory framework with harmonised sanctions throughout the EU, with minimum rules on criminal offences and criminal sanctions for those conducting market abuse within the EU or on EU markets.
Market Abuse Regulation (MAR)
MAR will apply to a wider range of securities and derivatives than the original MAD and will also cover financial instruments traded on all kinds of European trading venues: multilateral trading facilities (MTFs) such as the Alternative Investment Market (AIM); and organised trading facilities (OTFs) and related financial instruments. Instruments which depend on or affect the price of an underlying instrument, i.e. credit default swaps or contracts for difference will be caught and certain commodity spot transactions and carbon emission allowances will be covered more comprehensively. The new market abuse regime will include several carbon-specific elements for example, a specific definition of inside information, a tailored inside information disclosure duty, and a complete coverage of the primary market (auctioning). The manipulation of benchmarks will also be brought within the scope of market manipulation offence.
The definition of inside information under the new regime is similar to the current definition but MAR expands this definition to make it clear that inside information includes information that a reasonable investor would be likely to use as part of the basis of his investment decisions (reasonable investor test). Listed companies and their advisers will also be required to keep insider lists (ie lists of individuals who possess or have access to inside information) in a prescribed electronic format as set out in Commission Implementing Regulation 2016/347 which must be kept up to date. This contains more information than currently required and includes personal data that facilitates the identification of the insiders.
Issuer disclosure of inside information
Issuers of securities admitted to trading only on an MTF or OTF will be brought within the scope of the public disclosure obligation (if they have requested or approved that admission to trading). Article 17(1) of MAR provides that issuers should inform the public as soon as possible of inside information which directly concerns them. (There is a similar provision relating to emission allowance market participants.) Disclosure may be delayed providing certain conditions are met and in this event, the issuer's regulator must be informed immediately (in the case of the UK through an online FCA form) and in writing if requested as to the reason and include specified information.
Attempted insider dealing and attempted market manipulation
For the first time, attempted insider dealing and attempted market manipulation will be prohibited under MAR and the cancellation of orders is now also covered. There is a defence if the transaction or order was legitimate and in accordance with market practices accepted by the regulator.
MAR introduces a new regime on market soundings. MAR will require certain steps to be taken prior to conducting a market sounding and imposes detailed record-keeping requirements and information which will be set out in regulatory technical standards. A market sounding as defined may or may not involve the communication of inside information. MAR recognises that inside information can be legitimately disclosed to a potential investor in the course of market soundings undertaken "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, to one or more potential investors".
Persons discharging managerial responsibilities (PDMRs)
MAD already requires directors and other PDMRs within an issuer, and connected persons, to report transactions in the issuer’s securities, however there are changes and relevant individuals in a wider range of issuers will be caught due to MAR's increased scope. Under Article 19, PDMRs and persons closely associated with them are required to notify the issuer and competent authority of certain transactions in or related to the issuer’s financial instruments conducted on their own account and worth over €5,000 (Member states may raise threshold to €20,000). Such notification shall be made promptly and no later than three business days after the date of the transaction.
In addition to the previous reporting obligations of directors and senior managers about their own transactions in securities issued by their company, the new market abuse regulation also stipulates, for the first time, a legal closed period for such transactions: in all cases, 30 days prior to the publication of financial results. Issuers are also obliged to compile a list of the managers affected by this measure and of their close associates. Issuers also now have to inform directors and senior managers in writing about their obligations under the market abuse regulation. Directors and senior managers of the issuer are also required to inform relevant family members in writing about their obligations under the new regulation.
Suspicious transaction reporting
MAR introduces new procedures, notification and record keeping requirements for making suspicious transaction and also order reports. The requirements are aimed at market operators, investment firms that operate a trading venue and persons that professionally arrange or execute transactions.
Algorithmic and high-frequency trading
MAR extends the market abuse regime to capture algorithmic or high frequency trading undertaken without an intention to trade but for the purpose of, inter alia, disrupting or delaying the trading system.
New provisions in MAR are aimed at encouraging whistleblowers to come forward. In particular, member states will be able to provide financial incentives for whistleblowers in some circumstances.
New EEA-wide minimum standards are set for regulators’ enforcement and sanctioning powers. Authorities must have power to impose fines of up to at least €5 million for an individual and €15 million or up to 15 per cent of annual turnover for a firm.
The CSMAD sets out the criminal market abuse regime and requires national transposition and implementation. However, both the UK and Denmark have opted out of the CSMAD. Under the Lisbon Treaty, certain EU countries are not automatically bound by EU legislative proposals relating to freedom, security and justice matters. Instead, they may decide whether to opt in to any measure on a case-by-case basis. The UK government’s view is that UK criminal law covers all market abuse offences covered by the CSMAD, and it extends further than the CSMAD.
- requires Member States to take the necessary measures to ensure that the criminal offences of insider dealing and market manipulation are subject to effective, proportionate and dissuasive criminal sanctions.
- requires Member States to impose criminal sanctions for inciting, aiding and abetting market abuse, as well as for attempts to commit such offences (art. 5).
The adoption of the Directive means that:
- there will be common EU definitions for market abuse offences such as insider dealing, unlawful disclosure of information and market manipulation;
- there will be a common set of criminal sanctions, the penalties include fines and imprisonment of up to four years for insider dealing/market manipulation or inducing another person to engage in such activities and unlawful disclosure of inside information;
- legal persons (companies) will be held liable for market abuses;
- Member States need to establish jurisdiction for these offences if they occur in their country or the offender is a national;
- Member States need to ensure that judicial and law enforcement authorities dealing with these highly complex cases are well trained.
Article 2 provides the definitions including "financial instrument", "inside information" and definitions pertaining to MiFID.
Article 3 provides for the criminal offence of insider dealing, recommending or inducing another person to engage in insider dealing which constitute criminal offences when committed intentionally.
Article 4 provides for the criminal offence of unlawful disclosure of inside information when committed intentionally.
Article 5 sets out "market manipulation" and what constitutes a criminal offence. inciting, aiding and abetting market abuse, as well as for attempts to commit such offences as being punishable as criminal offences
Article 6 provides that Member States are required to take the necessary measures to ensure that inciting, aiding and abetting the offences as set out above are punishable as a criminal offence.
Article 7 requires Member States to impose criminal sanctions on those criminal offences, requiring them to be "effective, proportionate and dissuasive."
Article 8 provides for the liability of legal persons where such offences have been committed for their benefit and also where lack of supervision or control of the person in a leading position has made possible the commission of an offence for the benefit of the legal person.
Article 9 requires Member States to impose sanctions on those legal persons, which shall include criminal or non-criminal fines. (Here there is no mention of "criminal sanctions" as in Art. 6).