A new framework applicable to market abuse prohibition and prevention has been adopted by the European institutions. It consists of Regulation 596/2014 on market abuse (the “MAR”) and of Directive 2014/57/EU on criminal sanctions for market abuse (the “Sanctions Directive”), both of which were published in the Official Journal of the European Union on 12 June 2014. These two instruments replace and repeal Directive 2003/6/CE on insider dealing and market manipulation (the “MAD”), which had been implemented into Luxembourg by the Law of 9 May 2006 on market abuse.
The decision to adopt a regulation instead of a directive emphasises the necessity to harmonise core concepts and rules on market abuse in order to ensure effective and efficient enforcement of the rules. Revision of the MAD was also necessary to keep pace with market innovations and fill in the regulatory gaps developed over the course of more than ten years under the former regime. The main differences between the MAD and the new framework are highlighted below.
1. Expanded coverage of financial instruments
The scope of the MAR covers insider dealing on and market manipulation of financial instruments traded on a regulated market, a multilateral trading facility (“MTF”) or an organised trading facility (“OTF”) as defined under MiFID II (see related article in this newsletter), or for which admission to a regulated market or MTF has been requested. It also extends to OTC financial instruments the price or value of which depends on or has an effect on a traded instrument, including credit default swaps and contracts for differences. Under the MAD, the related instruments prohibition applied only to insider dealing. The MAR also forbids market manipulation of benchmarks such as the LIBOR or EURIBOR and of spot commodity contracts. Its regime further captures emissions allowances.
2. Further guidance on the definition of inside information
Inside information is defined as “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”.
The MAR explicitly includes the guidance provided by the European Court of Justice on the definition of insider dealing, and more particularly on the “precise nature” criteria. According to the MAR, 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 the intermediate steps of the protracted process may be deemed to be sufficiently precise to constitute inside information. In particular, an intermediate step will be deemed to be inside information if, by itself, it satisfies all criteria of inside information.
3. New market manipulation offences
Market manipulation under the MAR includes any behaviour, not limited to transactions or order placing, that may give a false or misleading signal to the market with respect to the supply of, demand for or price of a financial instrument or other instrument within the MAR’s scope. The MAR gives a non-exhaustive list of behaviours that may qualify as market manipulation and expressly includes spreading false or misleading rumours through the media, including the internet. The manipulation of benchmarks is also expressly prohibited, as is any attempt to engage in market manipulation and insider dealing. National competent authorities are competent for defining which behaviours are accepted market practices in line with the conditions laid out in the MAR, which fall outside the scope of the prohibition.
4. Reduced disclosure burden for SMEs
The MAR maintains the preventive measures existing under the MAD, including obligations for issuers to publish inside information and to draw up lists of insiders. However, in order to reduce the administrative burden on SMEs, the MAR adapts these measures for issuers whose securities are traded on an SME growth market (as defined under MiFID II). In particular, they are not required to draw up a list of insiders if they take all reasonable steps to ensure that any person with access to inside information acknowledges the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information, and if they may provide such a list upon request from the competent authority.
In addition, SMEs must disclose inside information as any other issuer is required to do. However they may publish the information on the trading venue’s website, instead of their website, if the trading venue chooses to provide this facility for issuers on that market.
5. Harmonised criminal sanctions
Without prejudice to the administrative sanctions laid out in the MAR, the Sanctions Directive requires all Member States to criminally reprehend the most serious offences of market manipulation, insider dealing and unlawful disclosure of inside information, when they are committed intentionally. The Sanctions Directive gives guidance as to what constitutes “serious” offences, e.g. based on the impact on the integrity of the market, the actual or potential profit derived or loss avoided or the level of damage caused to the market. The Sanctions Directive also gives more specific criteria for each category of offence.
Under the Sanctions Directive, the maximum term of imprisonment should be no less than four years for market manipulation and insider dealing, and two years for unlawful disclosure of inside information. In addition, the Sanctions Directive requires Member States to introduce criminal sanctions for legal persons, including fines or other measures such as a judicial winding-up.
These criminal sanctions may be imposed in addition to potential administrative sanctions, as is explicitly stated in the MAR.
6. Entry into force and implementation
The MAR is immediately applicable as of 3 July 2016, save for the provisions related to OTFs, SME growth markets and emissions allowances which shall become applicable on 1 January 2017. In addition, Member States should implement the Sanctions Directive and take the necessary measures to grant national competent authorities the powers deriving from the MAR by 3 July 2016.