Archive for the ‘Regulatory’ Category

The European Commission has published its legislative proposals which revise the Market Abuse Directive. The proposed new framework consisting of a Regulation (directly applicable rules) and a Directive aims at:

• adaptation of the EU rules to the new market reality, in particular by extending their scope to financial instruments only traded on new platforms and over-the-counter, as well as adapting rules to new technology
• clarifying that market abuse occurring across both commodity and related derivative markets is prohibited
• reinforcing cooperation between financial and commodity regulators
• introducing tougher and greater harmonisation of sanctions (including criminal sanctions), and
• reducing administrative burdens on small and medium sized issuers.

As for insider lists the Commission has concluded that differences in national laws implementing the MAD have imposed unnecessary administrative burdens on issuers. The Regulation aims to eliminate these by providing that the precise data to be included in such lists should be defined in delegated acts and implementing technical standards adopted by the Commission.

Applying the new market abuse framework of the Regulation in an undifferentiated manner to all SME growth markets may deter issuers on those markets from raising capital on the capital markets. Without prejudice to the objectives of preserving the integrity and transparency of financial markets and of protecting investors, the proposal therefore adapts the market abuse framework to the characteristics and needs of issuers whose financial instruments are admitted to trading on SME growth markets.

The scope and size of the business of those issuers is more restricted and the events giving rise to the need to disclose inside information are typically more limited than those of larger issuers. The Regulation therefore requires those issuers to disclose inside information in a modified and simplified market-specific way. Such inside information may be published by those SME growth markets, on behalf of those issuers, in accordance with a standardised content and format defined in implementing technical standards adopted by the Commission. Those issuers are also exempt, under certain conditions, from the obligation to keep and constantly update insiders’ lists.

The Regulation further clarifies the scope of the reporting obligations in relation to managers’ transactions. These reports serve important purposes by deterring managers from insider trading and providing useful information to the market about the manager’s view on the price movements of the shares of the issuers. The Regulation clarifies that any transaction made by a person exercising discretion on behalf of a manager of an issuer or whereby the manager pledges or lends his shares must also be reported to the competent authorities and be made accessible to the public. Moreover, it introduces a threshold of €20 000, uniform in all Member States, which triggers the obligation to report such manager’s transactions. This higher threshold will contribute also to reducing the administrative burden on SMEs.

The proposal now passes to the European Parliament and the Council for negotiation and adoption. Once adopted the regulation would apply from 24 months after its entry into force.

Relevant links & valuable resources:

• Copy of the press release

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1217&format=HTML&aged=0&language=EN&guiLanguage=en

• Proposal for a Regulation of the European Parliament and of the Council on insider dealing and market manipulation (market abuse)

http://ec.europa.eu/internal_market/securities/docs/abuse/COM_2011_651_en.pdf

• Proposal for a Directive of the European Parliament and of the Council on criminal sanctions for insider dealing and market maniuplation

http://ec.europa.eu/internal_market/securities/docs/abuse/COM_2011_654_en.pdf

• Commission’s Impact Assessment Accompanying the document Proposal for a Regulation on insider dealing market manipulation (market abuse)

http://ec.europa.eu/internal_market/securities/docs/abuse/SEC_2011_1218_en.pdf

• Official FAQ

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/715&format=HTML&aged=0&language=EN&guiLanguage=en

• Note from Freshfields Bruckhaus Deringer on the review of the Market Abuse Directive

http://www.freshfields.com/go/pdfs/Bank-of-the-Future-MAD-review-note.pdf

The UKA FSA has published the September 2010 edition (Issue No. 37) of its Market Watch newsletter. The newsletter deals with leaks of inside information.

During the past two years, the FSA conducted various intensive enquiries into disclosures of inside information to the media prior to certain announcements.

The aim of these enquiries was to identify suspicious contact between insiders to a corporate transaction and the media and included discussions with regulated firms as to their policies governing such contacts. In addition, the FSA continued its thematic work assessing regulated firms’ systems and controls on handling leaks.

The newsletter introduces the background and sets out the main findings on both work streams. It also contains a list of best practice recommendations in connection with contact with the media where the FSA believes improvement is necessary.

The FSA will continue to monitor for leaks of inside information. If no improvement is noticed in the level of leakage within the markets, the FSA is prepared to consider rule changes. However, it will also take action where it considers that unacceptable practices have occurred or existing systems and controls requirements applying to regulated firms and issuers have been breached.

Market Watch is available:

http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter37.pdf

Recent fall of the markets combined with first signs of recovery has once again turned shares to be affordable and attractive investment alternative to increasing number of public companies’ employees and managers. It is probably true that many of them are about to make greatest investments of the lifetime.

It is also clear that the higher level of personal account deals means higher risk of transactions that can instead of becoming great investment, turn out to be a worse nightmare not only for the investor, but also to the company.

No company wants to see headlines talking about badly timed sale or purchase of shares ahead of material news published about the company. The risk is particularly high due to increased sensitivity and nervousness still present in the markets, which includes tendency to overreact to both positive and negative news.

Thus call for review and tightening of systems and controls is pretty obvious and should be considered by all legal and compliance departments of publicly traded companies.

Below are just few general questions that those in charge of insider and personal account dealing policies may find useful to consider:

1. Have all members of the staff been provided adequate training about the content and of the insider policy and applicable restrictions on personal account dealing?
2. Do your personal account dealing rules require changes in holdings in company’s shares to be reported to the compliance function?
3. Do personal account dealing provisions require advance clearance of personal transactions? Prior to providing clearance (i.e. permission to trade), is there an arrangement in place for determining that:

• There is no closed-window (based on law or market rules) period to prevent the applicant from making the contemplated transaction;

• The applicant is not exposed to any specific matter that is qualified and treated as inside information (inter alia by checking records of opened project-specific lists of insiders) at the time of the application;

• There is no such matter ongoing in the company, which can clearly be qualified as material inside information, and which would expose the applicant to undue suspicions even in case the applicant is unaware of this particular matter.

The Committee of European Securities Regulators (CESR) has published its third set of guidance and information on the common operation of the Market Abuse Directive (MAD) on 15 May 2009.

The following topics are covered in the guidance:

• insider lists;

• suspicious transaction reports (STRs);

• stabilisation and buy back programmes; and

• the two-fold notion of inside information.

The guidance was published for European-wide consultation in two stages: (i) a first consultation paper covered topics on insider lists and STRs; and (ii) a second consultation paper dealing with the topics of stabilisation and the notion of inside information.

All issues have been integrated into this third set of guidance. However, CESR has emphasised that the third set of guidance has no formal legal status and does not necessarily represent the final word on the topics covered. CESR has also published one feedback statement on both of the consultation papers.

Copy of the Guidelines is available at: www.cesr.eu

The European Commission has launched a call for evidence on its review of the Market Abuse Directive (MAD) (including some preliminary findings and proposals to improve and simplify MAD). This is being done within the EU regulatory framework for financial services set out in the Communication “Driving European recovery” and the Commission’s action plan to reduce administrative burdens on EU companies by 25% by the end of 2012.

Although the Commission considers that the effect of MAD has generally been positive, it has identified some issues in the Directive that should be reviewed to enhance its effectiveness and to reduce possible unnecessary burdens. Such issues include:

• the scope of the markets and financial instruments covered by the Directive;
• the ability of listed issuers to delay disclosure of inside information;
• disclosure of inside information by issuers of commodity derivatives;
• the ability of competent authorities to gain access to telephone records and other data;
• the obligation to draw up insiders’ lists and to report the transactions of managers of issuers.

In addition, the paper deals with questions regarding short selling, a topic that is not expressly addressed in the current Directive. The deadline for comments is 10 June 2009.

The text of the call for evidence is available at: http://ec.europa.eu/

1. Introduction 

The EU Market Abuse legislation (directives, regulations and Level 3 guidelines), with the market integrity and investor confidence as its primary objectives, represents a major achievement towards integrated financial markets in EU.

As a matter of domestic legislation and other applicable rules deriving from the Market Abuse legislation, issuers are expected to have adequate preventive measures, systems, procedures and controls in place to ensure discharge of their regulatory obligations and make it as difficult as possible to commit market abuse. The higher the quality of systems and controls implemented by the issuers, the lower the likelihood that their financial instruments become subject to insider dealing or other forms of market abuse.

Given the importance of issuers’ compliance efforts under the Market Abuse regime, it is vital that substantially similar standards and compliance arrangements will evolve to protect investor confidence and market integrity within the EU. A pre-condition for such evolution is an objective understanding about issuers’ anti-market abuse systems, controls and compliance practices as applied on a daily basis.

A survey conducted between February and March 2008 among leading multinational companies listed on the Nordic Market (1)  in cooperation with the City of London, represents an effort to capture such understanding on a regional level.

The survey was conducted by means of confidential questionnaire addressed to general counsels and compliance officers of companies listed on the Nordic Market. The questionnaire focused on selected elements of preventive anti-market abuse systems and controls dealing with:

• identification of inside information within the issuer and its group
• ensuring fair trading by members of the management bodies and employees
• proper handling of inside information and prevention of leaks
• ensuring the quality and reliability of compliance procedures, techniques and record-keeping regarding the above
• internal allocation of responsibilities and tasks regarding the above.

This article summarizes the key-findings of the survey and aims to provide useful comparative information for those in charge of legal and compliance with respect to Market Abuse rules.

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CESR reports today on the progress made under the protocol for the supervision of branches in the context of the Markets in Financial Instruments Directive (MiFID).

In the months since the implementation of MiFID on 1 November 2007, 16 agreements for cooperation on the supervision of branches have been concluded between CESR Members. This progress is an important step in order to achieve effective and transparent supervision and to enhance co-operation amongst supervisors.

Further information can be found in the CESR press release published today.