The new EU Market Abuse Regulation (MAR) takes effect on 3 July 2016. The new Regulation will mean a number of quite substantial changes that Main Market company boards and their advisors will need to be aware of. These are considered below.
Code of dealings and the Model Code
The Model Code of directors’ dealings (currently in the Annex to Chapter 9 of the Listing Rules) will be deleted. The Financial Conduct Authority (FCA), which will be responsible for policing MAR, considers that its provisions are incompatible with MAR, particularly as regards permissible exemptions from the prohibition on dealings in a closed period (considered further below). The FCA is currently proposing to replace the Model Code with guidance on how persons discharging managerial responsibilities (PDMRs) should seek clearance to deal and what factors the issuer should take into consideration before giving clearance. There is no indication that there will be some new form of model code based on MAR, notwithstanding that this could lead to some uncertainty for issuers
MAR will substantially alter the regime for dealings by PDMRs. In particular, there is a new definition of “closed period” (the current regime uses the term “close period”), this being the period of 30 calendar days before the announcement of an interim financial report or year-end report which the company is obliged to make. This wording suggests that the disclosure of preliminary results will not bring to an end a closed period, which has the potential to reduce significantly the amount of “open” time available for dealing. There are tighter controls on permitted “dealings” during closed periods than is the case currently with fewer types of transaction falling outside the prohibition on dealing during closed periods, and, in addition, the FCA is proposing to publish guidance on applicable considerations as to whether clearance should be refused for dealings outside a closed period. The Disclosure Rules and Transparency Rules (DTRs) will be renamed the Disclosure Guidance and Transparency Rules. Chapters 2 and 3 of the DTRs will be replaced by MAR.
Disclosure of dealings under MAR
MAR requires companies to keep a list of PDMRs and those “persons closely associated” (PCAs) (the current regime uses the term “connected persons”) and to inform those persons of their obligations regarding disclosure of dealings. The obligation to notify only arises once a threshold of €5,000 has been reached in a calendar year – there is no such annual threshold under the current UK regime. On the other hand, the level of detail required in a notification is greater than is currently the case, notification must be made to the FCA as well as the issuer, and there is a new timeframe for compliance (three business days rather than four) as well as a prescribed format for making notifications.
MAR contains provisions which expressly govern the conduct of “market soundings” by issuers and person acting on their behalf (e.g. brokers) (referred to in MAR as “disclosing market participants” (DMPs)). A “market sounding” is a communication of information, prior to the announcement of the transaction, in order to gauge potential investor interest and the conditions relating to it, such as size or pricing. It may also apply in the context of an investigation of shareholder support for a takeover bid. Essentially, the provisions establish a safe harbour for the disclosure of inside information, in circumstances which, absent the safe harbour, would be unlawful. However, the safe harbour contains a number of safeguards to ensure it is not abused, such as a requirement that any DMP, prior to conducting a market sounding, must consider whether it will involve the disclosure of inside information and keep a written record of its conclusions and reasoning, which must be produced to the FCA on request. DMPs will also be required to establish procedures prescribing the manner in which market soundings are to be conducted, including obtaining the consent of the “Market Sounding Recipient” and reminding them of their obligations in respect of that information, including to keep it confidential.
Delaying the disclosure of inside information
As currently, it will be possible for an issuer to delay the disclosure of inside information in order not to prejudice its legitimate interests so long as certain conditions are not met. However, there is a new obligation that once an announcement of inside information is made, the issuer must notify the FCA that it delayed the announcement and, on making that notification, provide various details including the date when the inside information first existed, the name of the person who made the notification and those responsible for the decision to delay the announcement.
The definition of “inside information” is one thing that hasn’t greatly changed. Under MAR, “inside information” is “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 financial instruments”. Information is likely to have a “significant effect” on price if it is information that a reasonable investor would be likely to use as part of the basis for their investment decisions. This is substantively similar to the existing definition in section 118C of the Financial Services and Markets Act 2000 (which section will be repealed and replaced by MAR). This should mean that existing guidance on the meaning of “inside information” continues to be relevant.
Issuers are, of course, already obliged to create and maintain “insider lists” and that obligation remains under MAR. Issuers will be able to continue to split their insider lists into two parts – one for “permanent” insiders such as directors and PDMRs and the other for persons who will have access to insider information in respect of a specific transaction only. As currently, the list must be kept for at least five years. It must also be kept electronically. MAR is more prescriptive about content than the current regime, requiring the inclusion of additional information, including birth name (if different from current name); professional phone numbers (DDI and mobile); date of birth; NI number and personal phone numbers. There is also a requirement that issuers take all reasonable steps to ensure that persons on the insider list acknowledge in writing the duties this entails – the requirement for this to be in writing is a departure from the current regime.
MAR represents a radical overhaul of the existing disclosure regime. Issuers should:
- review their inside information policies and update them as necessary to reflect the changes introduced by MAR. This includes share dealing codes, insider list policies and market sounding policies
- review share incentive plans to ensure that they will continue to work in a compliant manner
- arrange refresher training for directors an PDMRs on their obligations under the new regime.