Europe: revising the Market Abuse Directive - Commission consultation

The European Commission has today published a consultation paper seeking views on revisions to the Market Abuse Directive (MAD) (2003/6/EC): see here (pdf). Amongst the questions asked are:

• Should MAD be extended to cover attempts to manipulate the market?
• How can the powers of competent authorities to investigate market abuse be enhanced?
• To what extent need the sanction regimes be harmonised at the EU level in order to prevent market abuse?
• How can the system of cooperation among national and third country competent authorities be enhanced? What should the role of the European Securities and Markets Authority be in this regard?

UK: delayed disclosure of liquidity support - FSA consultation

The UK's Financial Services Authority has published a consultation paper in which it proposes amending the Disclosure and Transparency Rules (DTR) in order to clarify that, in a limited set of circumstances, financial institutions admitted to trading on a regulated market and in receipt of liquidity support from the Bank of England can delay disclosure of this fact.

There is unlikely to be unanimous support for this proposal, not least because of the argument that the proposal (which is clearly designed to support financial stability) undermines the transparency of the market. The FSA nevertheless states in its consultation paper that its proposal is consistent with Article 3 of the European Market Abuse Directive (2003/124/EC) which recognises certain circumstances in which delayed disclosure can be justified. These circumstances are reflected in the current version of DTR 2.5. 

For further information see:

FSA press release | FSA newsletter | FSA consultation paper | Online response form | 

Europe: Commission Communication on financial services regulation

The European Commission has published a Communication titled Regulating Financial Services for Sustainable Growth: see here (pdf). The Communication describes the actions already taken by the Commission as well as forthcoming proposals. The Commission intends that the vast majority of its new proposals will be presented to the Council and European Parliament by the end of 2010.

These proposals will cover derivatives, credit default swaps, short-selling, improvements in the Markets in Financial Instruments Directive, revisions to the Deposit Guarantee Schemes Directive and the Investor Compensation Schemes Directive, revisions to expand the scope of the Market Abuse Directive to include derivatives, amendments to the Capital Requirements Directive (CRD IV), a Communication on sanctions in the financial services sector to promote convergence, and further work on international accounting standard convergence.

UK: the FSA flexes its muscles - part 2 - enforcement strategies

The UK's Financial Services Authority's Director of Enforcement, Margaret Cole, delivered a speech today which highlights further the approach now being taken by the FSA with regard to enforcement. The following extracts illustrate this point:

We have frequently stressed the importance of senior management responsibility and oversight. But, some of you might think that we haven’t matched our words with decisive action. Well, a recent study by Deloitte for the OFT confirmed what we already suspected, that action against individuals has a lot greater impact in terms of deterrence than action against firms ... you can expect to see more Supervision and Enforcement focus on individuals ... We’ve made a strategic decision to investigate more individuals

... this year we have brought 3 criminal prosecutions for insider dealing and we have more in the pipeline ... We feel that the threat of civil fines hasn’t worked as well as we would have liked. We’re convinced that the threat of a custodial sentence is a much more significant deterrent"

Note also this earlier post concerning market abuse.

UK: the FSA flexes its muscles - part 1 - rights issues and short selling

The UK's Financial Services Authority believes that in the current market conditions there is increased potential for market abuse through the short-selling of shares during rights issues. Such is the FSA's concern that new disclosure rules will come into force this Friday. These require the disclosure of short positions (0.25% or more) in shares admitted to trading on prescribed markets where a rights issue is taking place. FAQs concerning these rules have been published here. The rules have caused much disquiet, as reported here, not least because they were introduced without consultation.

UK: the super equivalence of the market abuse rules

In February this year, HM Treasury launched a consultation concerning the definition of market abuse within the Financial Services and Markets Act (2000). The FSMA definition is wider than that found in the European Market Abuse Directive (2003/6/EC) (it includes, for example, behaviour based on a wider set of information than the Directive).  For this reason HM Treasury sought views on the desirability of this position of "super equivalence".  HM Treasury's response to the consultation has now been published; to quote directly from the response document (para. 1.2):

Having an effective set of tools to tackle market abuse is crucial. This is a shared objective at the EU level and we are therefore keen that the EU review of the Market Abuse Directive should ultimately deliver an outcome that we consider fully satisfactory for combating market abuse. Pending this work we have decided to retain the areas in which we are superequivalent to the EU’s Market Abuse Directive until December 2009 to enable a wider consideration of their benefits for addressing identified issues with the EU regime and to minimise transition costs for industry".

For further information about the European Market Abuse Directive, see here and for discussion see Siems, M."The EU Market Abuse Directive: A Case-Based Analysis", 2007, available on SSRN here.

Postscript (11 June 2008): The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2008, which will extend the super equivalent provisions until 31 December 2009, have been published and come into force on 30 June 2008. 

UK: England and Wales: the Winterflood case and market abuse

The ICLR, as part of its (free) WLR Daily service has published a summary for Winterflood Securities Ltd & Ors v The Financial Services Authority [2010] EWCA Civ 423: see here.

UK: England and Wales: FSA wins market abuse case in Court of Appeal

The Court of Appeal gave judgment yesterday in Winterflood Securities Ltd & Ors v The Financial Services Authority [2010] EWCA Civ 423, an important decision concerning market abuse under Section 118 of the Financial Services and Markets Act (2000).

The court held that an actuating purpose - defined in the FSA Handbook glossary as "a purpose which motivates or incites a person to act" - was not required in respect of two examples of market abuse (price positioning and artificial transactions) in the Code of Market Conduct.

The FSA has welcomed the decision: see its announcement here. Background facts for the case are available here (pdf).

Europe: CESR report on MAD options and discretions

The Committee of European Securities Regulators has published a report exploring Member States' use of options and discretions under the Market Abuse Directive: see here (pdf). A summary of the report is available in the accompanying press release: see here (pdf).

UK: the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2009

The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2009 were made on 30 November, laid before Parliament yesterday and come into force on 31 December 2009. The Regulations have been published on OPSI: see here (html) or here (pdf). In the accompanying explanatory memorandum their purpose is explained (paras. 7.1 to 7.3): 

The United Kingdom currently has a wider definition of market abuse than that established in the EU’s 2003 Market Abuse Directive. When the Treasury transposed the Directive, the main challenge was to decide how much change was appropriate to the civil market abuse regime that had been put in place as part of Financial Services and Markets Act (FSMA) in 2000. The FSMA regime and the Market Abuse Directive cover similar ground but adopt a slightly different approach to prohibiting abusive behaviour. The original FSMA regime defined market abuse in fairly broad terms and then qualified it by the requirement that behaviour is only abusive if it is likely to be regarded as such by a ‘regular user’ of the market. The Directive set out more specific descriptions of the type of behaviour that is to be prohibited.

On balance, it was decided to retain the scope of the existing market abuse prohibitions to the extent that these go beyond the prohibitions in the Directive (the new sections 118(4) and 118(8) of FSMA) but to make them subject to a sunset clause whereby the provisions would expire after a period of three years pending the outcome of a review by HM Treasury to assess whether they remain justified.

It was initially decided to extend the sunset clauses until 31 December 2009 until the outcome of the EU’s review of the Market Abuse Directive became known. This was done in the 2008 Regulations. The EU’s review of the Market Abuse Directive was subsequently delayed. The call for evidence was only launched on 20 April 2009, and the Commission has not yet published proposals to amend the Directive. It has therefore been decided to extend the sunset clauses further until 31 December 2011".

UK: Market abuse and insider dealing

The UK's Financial Services Authority's Market Watch Newsletter 26 was published yesterday. It provides an update on the FSA's work in deterring and prosecuting market abuse. The Newsletter explains the FSA's approach to the detection of insider dealing and provides further information about the FSA's market cleanliness research (about which click here).

Perhaps the most important statement in the Newsletter concerns the manner in which the FSA seeks to deter market abuse. The FSA has, thus far, relied upon administrative sanctions (see here) but the Newsletter makes clear that a greater role is now seen for criminal prosecutions in recognition of what the FSA describes as "the significant deterrent effect of custodial sentences".

One of the perceived advantages of administrative sanctions is said to be the lower standard of proof: the "balance of probability" rather than, as in criminal prosecutions, "beyond reasonable doubt". It can, however, be difficult to draw a distinction where the alleged misconduct is serious. Thus, as the Financial Services and Market Tribunal stated in the important market abuse decision Davidson & Tatham v FSA (2006) (paras. [198]-[200]):

"...we conclude that there is a single civil standard of proof on the balance of probabilities but that it is flexible in its application. The more serious the allegation, or the more serious the consequences if the allegation is proved, the stronger must be the evidence before we should find the allegation proved on the balance of probabilities. We regard the allegations of market abuse, the subject of these references, as very serious allegations indeed. We also note that if the allegations are proved the consequences will be very serious also. A penalty of £750,000 imposed on Mr Davidson, an unregulated individual, is very serious. A penalty of £100,000 imposed on Mr Tatham, together with the professional consequences, is also very serious. Accordingly, although there remains a distinction in principle between the civil standard and the criminal standard, the practical application of the flexible approach means that they they are likely, in the context of these references, to produce the same or similar results".

UK: FSA imposes largest fine to date against an individual for market abuse

The Financial Services Authority has fined Mehmet Sepil, the chief executive officer of Genel Enerji, a Turkish oil exploration company, £967,005 for dealing in the shares of a UK listed company (Heritage Oil Plc) on the basis of inside information. The fine was made up of a profit disgorgement element (£ 267,005) and penalty (£ 700,000) and is the largest so far imposed by the FSA against an individual for market abuse under the Financial Services and Markets Act (2000). The penalty of £ 700,000 was reduced from £ 1,000,000 because Mr Sepil agreed to settle at an early stage in the FSA's investigation. In its final notice, the FSA stated (paras. 3.3 and 3.4):

The FSA finds that you did not set out to commit market abuse, that you were not familiar with the legal requirements which prohibited you from dealing in Heritage shares, and that you had not received advice on these at the time. This was a serious example of insider dealing by a person in a key position of responsibility. While you were not an approved person, you were the Chief Executive Officer of a company engaged in takeover discussions and had inside information about Heritage’s operations".

Genel Enerji’s chief commercial officer and its exploration manager were also fined for dealing in Heritage’s shares on the basis of inside information.

For further background information see here.

Europe: legislation under review

In a speech delivered this week at the annual dinner of the Quoted Companies Alliance, European Commissioner Charlie McCreevy outlined work currently being undertaken concerning the operation of the Prospectus, Transparency and Market Abuse Directives. In this regard, Mr McCreevy observed:

We are currently carrying out an evaluation of the functioning of the EU Prospectus regime, five years after it was put in place. Overall, our assessment is positive; however, we have identified a number of areas where the regime does not work as efficiently as we would like. Also we have found a number of unintended consequences nobody thought about when the text was agreed. Employee shares schemes are one example. But there are others. These are the areas where we want to propose changes to reduce the administrative burden on issuers, without lowering investor protection standards.

One thing that we have heard so far is that the way Member States have implemented the [Transparency] Directive has not helped. My services are currently conducting research on the extent of the national gold plating. The preliminary findings show that problems with the Directive may not always be Brussels' fault. Interestingly, in the UK there are some slightly more stringent transparency measures in place because some obligations from a previous regime were maintained when transposing the Directive. Actually, when they were consulted, market participants had expressed a preference for the older rules they already knew. So, the UK chose to listen to market participants and did not to take all the opportunities for simplification offered by the Directive.

At the moment, we are commissioning an independent study on the way in which the Transparency Directive operates in practice. A survey on stakeholders' perceptions will be an important component of this study. And we will be listening carefully to smaller quoted companies. This study will help the Commission evaluate the Directive in 2009. I hope that it will help us identify any problems and how best to address them.

Our review of the Market Abuse Directive is well underway. It will look at the efficiency of the Market Abuse framework and, more precisely, its scope of application, insider dealings, market manipulations, the powers of national administrative authorities and the sanctioning process. This review will give us an excellent opportunity to simplify some provisions of the Directive".

Note: Research undertaken by the Commission concerning the operation of the Prospectus Directive was published in June and is available here.

Europe: ECJ considers the market abuse directive

The opinion of the European Court of Justice in Spector Photo Group NV, Chris Van Raemdonck v Commissie voor het Bank, Financie- en Assurantiewezen (CBFA) (Case C-45/08) was given last week. The case, referred from the hof van beroep te Brussel (Court of Appeal of Brussels), required the ECJ to interpret, for the first time, the Market Abuse Directive (2003/6/EC). Article 2 provides:

1. Member States shall prohibit any person referred to in the second subparagraph who possesses inside information from using that information by acquiring or disposing of, or by trying to acquire or dispose of, for his own account or for the account of a third party, either directly or indirectly, financial instruments to which that information relates.

The first subparagraph shall apply to any person who possesses that information: [a] by virtue of his membership of the administrative, management or supervisory bodies of the issuer; or [b] by virtue of his holding in the capital of the issuer; or [c] by virtue of his having access to the information through the exercise of his employment, profession or duties; or [d] by virtue of his criminal activities".

The ECJ was required to consider, inter alia, whether making use of information for the purposes of Article 2 would be satisfied by the mere fact that a person in possession of inside information, acquires or disposes of, or tries to acquire or dispose of, for his own account or for the account of a third party, financial instruments to which that inside information relates. The ECJ held that this would amount to the use of inside information but recognised the right to rebut the presumption. In reaching this position, the ECJ made clear that the questions before it:

... must be determined in the light of the purpose of [the] directive, which is to protect the integrity of the financial markets and to enhance investor confidence. That confidence is based, in particular, on the assurance that they will be placed on an equal footing and protected from the misuse of inside information. Only usage which goes against that purpose constitutes prohibited insider dealing".

Further information is available in the ECJ's press release, available here (pdf).