U.K.-listed companies must comply with new EU Market Abuse Regulation (MAR) from 3 July this year. To prepare them for this, the Financial Conduct Authority (FCA) has published changes conforming to the new regulation to its handbook, which will come into force at the same time as EU MAR will apply. The sourcebook for the new legislation is the Disclosure Guidance and Transparency Rules sourcebook.
The handbook and MAR cover a very wide range of “market abuse” from insider dealing to improper disclosure, manipulating transactions, dissemination, misleading behaviours, and distortion. They also cover reporting of infringements and of suspicious transactions, as well as a range of disclosure and transparency rules, including permissible modification of rules, information gathering and publication, suspension of trading, fees, safe harbours and sanctions, publication of information on the internet, and dealing with rumors. There is also a final chapter on other issues raised by respondents to the consultation papers that are not covered by the current regulations but which the FCA has taken under consideration.
The entirety of the rules and amendments are reproduced in a set of annexes to the handbook, with new text underlined and old text deleted, and there are many more deletions than there are additions. Lucy Reeve, senior associate with law firm Linklaters, noted that: “The deletions are because of the change in the legal status of the European market abuse regime from a Directive to a Regulation. When it was a directive, the U.K. had to implement the rules, but now it is a regulation; it has a direct effect. What remains is just interpretive of the regulations.”
Fundamentally MAR has been designed to prevent insider dealing. Regulations cover what is inside information and who is an insider. For example, inside information must be released to the market as soon as possible, as under the old directive, with delays permissible only if market sensitive information must be protected. If there is a delay, then the FCA must be informed of the date and time of the decision, though issuers only need provide a written explanation upon the FCA’s request. The definition of what is inside information is set very low, such as: “could an investor use the information to make an investment decision.” The handbook and the regulations also require detailed recordkeeping, such as when inside information arises and keeping insider lists with extensive data. PDMR dealings and those of their closely associated persons must be disclosed both to the market and the FCA within three business days. PDMRs are “persons discharging managerial responsibilities” and their “closely associated persons” are family and business connections. PDMRs are directors and senior managers who have regular access to inside information.
Based on feedback, the FCA is maintaining the threshold at €5,000 pursuant and will not at this stage be increasing the threshold to €20,000. It also noted the feedback advising that issuers should disclose all transactions voluntarily, which it says is also permissible. “A large number of companies have indicated that they will ignore the threshold for reporting,” said Reeve. “It is easier to disclose all dealings than to take the risk of unintentional breach by miscalculating whether someone has passed the threshold.”
Restrictions on when PDMRs can deal are also outlined in detail; for example, not in a closed period (the 30-day period before financial announcements), or if the PDMR has inside information that has not been released to the market. These transactions were all covered by the Model Code, but this has now been retired, though companies are free to keep their own codes as long as they comply with the new regulations at a minimum. Reeve said that, in her experience, the vast majority of listed companies like to have a clearance process when PDMRs are dealing and will be retaining their codes. “Requiring clearance for dealings is a useful compliance tool so there is no chance of anyone breaching the rules inadvertently.”
While publication of the handbook gives the market a lot more clarity, a number of outstanding questions remain, according to Linklaters. “Everyone is in the same position,” clarified Reeve, “but the regulations apply a closed period to the 30 days before the annual report is published, which is a period when, in reality, no one has any useful inside information because the preliminary results have already been issued. It’s the period between the financial year-end and the publication of the preliminary results when people are more likely to have inside information. But that’s not a closed period under the regulations. It might, however, be a prohibited period because of the possession of inside information. In practice, many companies will continue to advise PDMRs not to deal between fiscal year-end and the preliminary announcements. Because of the typical calendar,” continued Reeve, “many companies are facing a double closed period. After the preliminary announcements is usually the first opportunity for issuers to deal in shares, for example to make share incentive awards, so some companies are considering spreading the time between prelims and publication of the annual report so they can get things done.” In addition, qualified Reeve, the EU might return to the issue and address this anomaly by making the period prior to preliminary announcements also a closed period under MAR.
“At present, many of the regulations, such as preventing share buyback programmes during prohibited periods other than through a pre-arranged broker programme, have been deleted because they are incompatible with MAR,” said Reeve. “This does not mean that issuers can freely buy back shares at these times, so it’s likely that companies will still appoint brokers.”
The handbook also contains a Policy Statement in which the FCA summarises the feedback it received on its consultation papers, CP15/35, which closed on 4 February 2016, and CP15/38, which closed on 20 February 2016. Some of the feedback was incorporated into the changes. Suggestions that the FCA copy and paste EU MAR into the handbook were not followed, rather links to the relevant regulations were included; something the FCA calls “signposts.”