COVID-19 has changed so many aspects of life, and corporate governance is no exception. From refocusing attention on all matters ESG-related to necessitating a shift to virtual and hybrid meetings, the last year has seen companies pivot and adjust in an agile manner. But it is becoming more obvious as time goes on that we may never go back to what was ‘normal’ in 2019 and that we should embrace the changes going forward.
Table of Contents
Here are the main elements of MAR that relate to insider trading compliance for issuers.
MAR defines inside information in Article 7(4) as information of a precise nature “which, if it were made public, would be likely to have a significant effect on the prices of financial instruments, derivative financial instruments, related spot commodity contracts, or auctioned products based on emission allowances shall mean information a reasonable investor would be likely to use as part of the basis of his or her investment decisions.”
If the information is yet to be made public and would affect the price of relevant financial instruments protected by MAR, it is inside information. Even information that does not seem to meet those criteria, but, when combined with other information, could give someone an unfair investment advantage, can be deemed to be inside information.
Insider trading definition
The regulation refers to insider dealing, or insider trading, as a situation where:
“a person possesses inside information and uses that information by acquiring or disposing of, for its own account or for the account of a third party, directly or indirectly, financial instruments to which that information relates. The use of inside information by cancelling or amending an order concerning a financial instrument to which the information relates where the order was placed before the person concerned possessed the inside information, shall also be considered to be insider dealing. In relation to auctions of emission allowances or other auctioned products based thereon that are held pursuant to Regulation (EU) No 1031/2010, the use of inside information shall also comprise submitting, modifying or withdrawing a bid by a person for its own account or for the account of a third party.”
Examples of insider trading include selling stock or cancelling an order for shares in a company because you are aware of an event that will negatively affect an issuer’s share price, but which is yet to be made public. Similarly, buying stock in a company armed with the inside knowledge that they are about to be taken over or disclose great financial results at the end of the fiscal quarter and the price of their shares is about to rise.
It is also an insider trading offence to solicit a third party to carry out these actions, based on inside information. Innocence cannot be pleaded even if the offender accidentally gains access to inside information or unwittingly passes inside information to another party.
In MAR, Article 18 is dedicated to insider lists. It requires issuers to
- “draw up a list of all persons who have access to inside information and who are working for them under a contract of employment, or otherwise performing tasks through which they have access to inside information, such as advisers, accountants or credit rating agencies (insider list);
- promptly update the insider list in accordance with paragraph 4*; and
- provide the insider list to the competent authority as soon as possible upon its request.”
* Paragraph 4 requires organisations to update their list of persons with inside knowledge, or the insider list as soon as possible. The update is required when the reason for their inclusion changes, when someone needs to be added or when someone needs to be removed as they have ceased to be in possession of inside information.
The issuer is also under the obligation to instruct anyone included in the insider list of their legal obligations not to disclose such inside information or to make trading decisions on the basis of such information.
MAR regulates all employee trades but there are strict protocols specifically designed to prevent market abuse by persons discharging managerial responsibilities, or PDMRs, such as executive officers of the company. Article 3 (1.25) defines them in this manner:
“‘person discharging managerial responsibilities’ means a person within an issuer, an emission allowance market participant or another entity referred to in Article 19(10), who is:
(a) a member of the administrative, management or supervisory body of that entity; or
(b) a senior executive who is not a member of the bodies referred to in point (a), who has regular access to inside information relating directly or indirectly to that entity and power to take managerial decisions affecting the future developments and business prospects of that entity;”
PDMRs and any person closely associated (PCA) with them, including immediate family such as spouses and dependent children, relatives living in the same house as the PDMR for more than a year, and business partners and legal entities run by PDMRs, must notify regulatory authorities and the issuer when they enter into personal transactions with the issuer’s financial instruments that exceed a certain value, determined by the local legislation. If the transaction is below the threshold and is executed, the issuer must announce this publicly within three working days.
The reason for this rule is that PDMRs are likely to have an insight into trades and access to inside information that gives them an unfair advantage over regular investors in such transactions. PCAs, therefore, could wittingly or unwittingly access that information, too.
In Article 11(1), the definition of market soundings is given as
“the communication of information, prior to the announcement of a transaction, 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 by:
- an issuer;
- a secondary offeror of a financial instrument, in such quantity or value that the transaction is distinct from ordinary trading and involves a selling method based on the prior assessment of potential interest from potential investors;
- an emission allowance market participant; or
- a third party acting on behalf of the account of a person referred to in point (a), (b) or (c).”
Market soundings are an advantageous way of working out how to price financial instruments, whether to consider the sale of the company, what conditions to set in an offer and other moves in the market. However, by their nature, they may involve the disclosure of information that is not otherwise known publicly.
For example, an issuer might want to assess the willingness of holders of the company’s securities to sell as part of a potential merger or acquisition. This specific, non-public information would certainly affect the share price if made public, meaning it fits the definition of inside information, which usually should not be disclosed. However, in order to make the sounding, it has to be disclosed. Thankfully, MAR allows for this eventuality in Article 11.4 which states that
“disclosure of inside information made in the course of a market sounding shall be deemed to be made in the normal exercise of a person’s employment, profession or duties.”
This makes it allowable as long as no one acts on that information to gain an advantage. It is referred to as a ‘safe harbour’.
With market soundings, there are record-keeping requirements for both the disclosing market participant (DMP), the party making the sounding and the person receiving the market sounding (MSR).
DMPs should note:
- the names of those who received the sounding, the date and time it took place and details of any follow-up
- the details of the communication, including documents sent to the MSR in the course of the market sounding
- any recordings of in-person or telephone conversations, or detailed written minutes for unrecorded meetings, as well as copies of written communications between the DMP and the MSR
- the details of those who declined the sounding and the undertaking not to contact them, if applicable
- the DMP’s policies on market soundings
The DMP should keep these records for five years in a durable medium that can be easily read. In addition, the DMP should keep an insider list of those individuals in possession of inside information, as is required by MAR.
MSRs should keep:
- a record of a disclosure to a DMP that it wished to decline market soundings, if applicable
- an assessment of whether the disclosure featured inside information and whether it continues to be inside information
- details of any disagreement with the DMP over the status of the information
- a record of internal procedures and instructions on market soundings
- an assessment of the issuer and financial instruments affected by the inside information
- an insider list of everyone with knowledge of the inside information
- details of everyone employed or acting on their behalf who has access to the information, whether it is inside information or not
The MSR should keep these records for at least five years.
Article 12 lists the actions that can be deemed as market manipulation or market abuse. They include:
“entering into a transaction, placing an order to trade or any other behaviour which:
(i) gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument, a related spot commodity contract or an auctioned product based on emission allowances; or
(ii) secures, or is likely to secure, the price of one or several financial instruments, a related spot commodity contract or an auctioned product based on emission allowances at an abnormal or artificial level”
Other actions considered market manipulation include using a “fictitious device” or any other form of deception to fix a price, disseminating false information or rumours online, on social media or in the traditional media, to affect the price of a financial instrument. The list also features “providing false or misleading inputs in relation to a benchmark where the person who made the transmission or provided the input knew or ought to have known that it was false or misleading, or any other behaviour which manipulates the calculation of a benchmark.”
Here are details of regulations relating to insider trading compliance for issuers in the EU:
|Market Abuse Regulation||This is the EU’s major market abuse regulation, compiling all of the measures deployed to prevent market manipulation and insider dealing.|
|Implementing Directive for MAR (December 2015)||The implementing directive lays down the processes for reporting and following up on reports of infringements or suspected infringements.|
|Delegated Regulation for MAR (December 2015)||This delegated regulation provides detailed rules for a number of aspects of the main regulation. They include lists of bodies in non-EU countries that are exempt from MAR, indicators of market manipulation and the types of PDMR transactions that require reporting.|
|Delegated Regulation for MAR (March 2016)||This delegated regulation contains regulatory technical standards for the appropriate arrangements, systems and procedures as well as notification templates to be used for preventing, detecting and reporting abusive practices or suspicious orders and transactions.|
|Implementing Regulation on Insider Lists (March 2016)||The implementing regulation indicates the required format for insider lists and the procedures for updating lists.|
|Implementing Regulation on PDMR Notifications (March 2016)||The implementing regulation details the required format for notifications of PDMR transactions.|
|Implementing Regulation on Market Soundings (May 2016)||This regulation sets the requirements for the systems and templates that DMPs must use, the format of market soundings and the records that should be kept.|
|Delegated Regulation on Market Soundings (May 2016)||Features regulatory technical standards (RTS) for the appropriate arrangements, systems and procedures for disclosing market participants conducting market soundings.|
|Implementing Regulation on Delaying Public Disclosure of Inside Information (June 2016)||The implementing technical standards (ITS) with regard to the technical means for appropriate public disclosure of inside information and for delaying the public disclosure of inside information|
What are the consequences of non-compliance?
There is a range of financial penalties that can be levied at natural and legal persons as a result of non-compliance with MAR. This table shows the different sanctions for the various infringements.
Who is liable for insider trading?
Both individuals and companies can be held liable for insider trading. For example, if a company fails to remind employees featured on an insider list of their legal responsibilities not to use that information to gain an advantage in the market, both the individual and the company will be fined. The individual — for committing the offence with a purchase, sale or cancellation using inside information, and the company — for neglecting its legal obligations.
How can businesses ensure adequate records are maintained?
Using an online tool to create and maintain insider lists is the best way to ensure records are kept in a compliant manner. One such tool is InsiderLog which automates the process of setting up the insider list and informing those with insider knowledge of their legal responsibilities. The platform uses the templates predefined by the implementing regulations so that you have all the information required by MAR. It even helps you track PDMR and PCA transactions.
|MAR Article Infringement||Maximum Sanctions|
|For a natural person
|14 (insider dealing and unlawful disclosure of inside information) and 15 (prohibition of market manipulation)||Up to €5,000,000 in fines|
|16 (prevention and detection of market abuse) and 17 (public disclosure of inside information)||Up to €1,000,000 in fines|
|18 (insider lists), 19 (PDMR transactions), and 20 (investment recommendations and statistics)||Up to €500,000 in fines|
|For legal persons
|14 and 15||Up to €15,000,000 or 15% of the annual turnover from the last available accounts|
|16 and 17||Up to €2,500,000 or 2% of the annual turnover from the last available accounts|
|18, 19, and 20||Up to €1,000,000 in fines|
Insider trading compliance is essential for avoiding violations and the respective litigation that could ensue. MAR is in place to make the trading environment fair for all participants. It is in the interests of issuers that it remains this way so that the investors and the general public are reassured that securities markets in the EU are protected and regulated.
If you are looking to improve your compliance processes and systems, try InsiderLog. It can help you meet your record-keeping requirements under MAR while easing the administrative burden.