A briefing issued earlier this month by law firm Linklaters entitled “MAR one year on: time for listed companies to reflect?” suggests that the Market Abuse Regulation (MAR) has “so far failed in its aim to introduce a harmonised framework across Europe as there are divergences in practice even within the U.K.” according to counsel Lucy Reeve. “There are places in the rules that are open to more than one possible interpretation,” she continued, “so it’s only natural that, while the market settles down and gets used to the new regime, we will see different approaches being taken. One relates to the treatment of financial results in line with market expectation. Most U.K. issuers are not labelling these as inside information, although a number are. In some other member states, such as the Netherlands, the opposite is true and more issuers do label them as inside information.”
MAR, which came into force from 3 July last year, enforced by the Financial Conduct Authority (FCA), deals with a wide range of possible abuses, from insider dealing to improper disclosure, manipulating transactions, dissemination, misleading behaviours, and distortion. It also covers 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 rumours. While many of these have been standardized, the briefing concentrates on the one area where there continues to be both confusion and differences in practice—the release of inside information.
Inside Information Decision Tree
According to the briefing, “Many extra hours have been spent around the board table or on the phone to brokers and lawyers agonising over whether a particular scenario is inside information or trying to pinpoint exactly when it will become inside information.” While it is advised that treating everything as potential inside information is prudent, companies should be wary of labeling everything thus, as setting the bar defining what is and isn’t inside information too low might end up tripping the company up later if the same standards are not adhered to. On the other hand, inside information is loosely defined as “information that a shareholder might use to help decide on the sale or acquisition of stock.”
“Another area of confusion is on insider lists,” added Reeve. “Most of the market accepts that you do not need to include transaction counterparties and their advisers on an issuer’s insider list (so, for example, if a listed company is entering into a joint venture, the joint venture party and its advisers would not go on the issuer’s insider list). Yet we are still seeing confidentiality agreements that seek to impose this obligation on transaction counterparties, when there is no need to.”
In addition to deciding whether something is classed as inside or not and who are the insiders, there is also the decision of whether or not its announcement can be delayed. Legitimate reasons for delay have been classified by the European Securities and Markets Authority (ESMA) and, in Britain’s case—and this seems likely to remain so even after Brexit—have been adopted in full by the FCA. They include decisions approved by a management body that need approval from a supervisory body (where a company has a dual board structure, for example), as well as situations where immediate disclosure would jeopardise:
the outcome of ongoing negotiations
the implementation of the issuer’s plans to buy or sell a major holding in another entity
the issuer’s ability to meet requirements that might be imposed by a public authority where a previously announced transaction is subject to that authority’s approval the interests of shareholders and conclusion of negotiations when the financial viability of the issuer is in grave and imminent danger
the intellectual property rights of the issuer when it has developed a product or invention
There are a number of compliance requirements associated especially with a legitimate delay. An insider list must be kept, the FCA must be notified of the delay in disclosure, and the requisite records must be kept of when the inside information first arose. According to Linklaters, the FCA frequently launches inquiries after significant announcements to determine “if the correct procedures have not been followed, or if an announcement has not been badged as inside information but triggers a price movement.” Disclosure and Transparency Rule 6 also requires companies to classify announcements according to legal obligations, so they should not simply be labeled “contains inside information” but also as being made under Article 17 MAR.
If there are no reasons for delay, then announcements should be made “within hours, if not minutes” of the information coming to light. It is this area that is leading to divergent practice, especially where information comes to light outside of trading hours. There is no set approach, with some companies opting to issue as soon as the market opens, with others press releasing the information at the time it is known and then being accused of burying news, if this is on a Sunday night, for example. FCA rules used to be more constrained, but in line with MAR they were loosened, with the consequent dilution of approach.
Asked what were the differences in approach from country to country in the European Union, Reeve said: “The subtle differences we see between countries are in how boards and compliance teams approach the challenges of MAR in practice. Each country has its own corporate governance framework and this influences how companies make decisions and what procedures they put in place. For example, a dealing clearance process for PDMRs [persons discharging managerial responsibilities] and insiders is common in U.K. companies as a means of ensuring that PDMRs don’t deal in closed periods or when they are insiders, because this is a reassuring and familiar process for companies that used to have a clearance process under the old Model Code. Elsewhere it is much less common, as other countries don’t have an equivalent background.” Another major difference is in the area of disclosure committees. “A lot of U.K. companies have disclosure committees to streamline the process for making fast decisions about whether an announcement is needed,” said Reeve. “Companies don’t tend to have these in other countries.”
As if to help with these differences, on 6 June, the (ESMA) issued final Implementing Technical Standards (ITS) regarding the application of the MAR. These ITS clarify how national competent authorities (NCAs) should cooperate with each other under MAR and set out procedures and forms for NCAs on how to exchange information and give assistance. The ITS were sent for endorsement to the European Commission which has three months to do so. “Once fully implemented, these ITS will contribute to delivering a regulatory rule-book for securities markets,” said the press release announcing the standards.
They cover procedures for communications between NCAs, including designated contact points—which will be held centrally by the ESMA—as well as processes for a range of other cooperations, including:
taking personal statements
investigations or on-site inspections
assistance in recovering pecuniary sanctions
unsolicited exchanges of information
restrictions and permissible uses of information