100 days of MAR: the top ten Q&As

Now that MAR has been up and running for several months, we take a look at some of the questions that seem to come up repeatedly, consider the answer to those questions and examine where else clarity may be needed.

First published on Thomson Reuters Regulatory Intelligence on 11 October 2016.

It has now been over three months since the Market Abuse Regulation (MAR) came into force on 03 July 2016.  Even at the time of implementation, there remained some uncertainty about aspects of this regulation, particularly in relation to share dealings, dealings by persons discharging managerial responsibility (PDMRs) and the disclosure of inside information.  The FCA has provided guidance which goes some way towards dealing with this uncertainty, for example, in its Policy Statement PS16/13 (April 2016) and in the Disclosure Guidance and Transparency Rules. Similarly, the European Securities and Markets Authority (ESMA) also published guidance where it was mandated to do so by MAR.

However, gaps still remained and as a result, a number of industry bodies, including the City of London Law Society and Law Society Company Law Committees’ Joint Working Parties on Market Abuse, Share Plans and Takeovers Code (CLLS), the Association of Investment Companies (AIC), the Institute of Chartered Secretaries & Administrators, the Quoted Companies Alliance and the GC100 have sought to close that gap further with the publication of various materials that aim to provide clarification as well as specimen dealing policies, codes and procedures manuals.  Although these publications are guidance only and are not endorsed by the FCA or ESMA, they provide a useful source of information to industry participants.

Now that MAR has been up and running for several months, we take a look at some of the questions that seem to come up repeatedly, consider the answer to those questions and examine where else clarity may be needed.  

PDMR Dealings

By far the majority of questions that have emerged from this area of the regulated industry relate to PDMR dealings.  This is perhaps not surprising given that it is an area that directly impacts individuals and where some of the most significant changes to the legislation have occurred. Some of the most common queries include the following:

Q1: Who do the notification and restriction requirements apply to?

MAR contains a requirement on individuals to notify the issuer and the competent authority of transactions related to shares and debt instruments (or linked financial instruments) of the issuer, and also restrictions on dealing during MAR ‘closed periods’.

The notification requirements apply to PDMRs and their persons closely associated, in respect of “every transaction conducted on their account”. The CLLS has clarified that this therefore also includes transactions conducted by other third parties i.e. discretionary investment managers.

The restriction requirements apply only to PDMRs. However, companies can of course voluntarily restrict persons closely associated and discretionary investment managers.

Q2: Does the announcement of preliminary results end a MAR "closed period"?

MAR has introduced a prohibition on the dealing of shares and debt instruments (or linked financial instruments) of an issuer by PDMRs during a MAR "closed period", except in limited circumstances. Under the previous regime, the announcement of preliminary results ended the ‘close period’ (as it was formally called), but there was uncertainty as to whether this would continue under MAR.

In its “Questions and Answers on the Market Abuse Regulation” dated 13 July 2016, ESMA clarified that the announcement of preliminary results will end a MAR "closed period" provided that the announcement contains all the key information relating to the financial figures expected to be included in the year-end report. If the information announced changes, this will not trigger another MAR "closed period" but should be dealt with in accordance with the provisions in MAR for disclosure of inside information. The FCA has subsequently confirmed ESMA’s approach.

Q3: What PDMR transactions are restricted during a MAR "closed period"?

Generally speaking, when considering whether or not a PDMR transaction is restricted under MAR, the key questions are whether the transaction is automatic or discretionary, and if discretionary, when the decision to conduct the transaction was taken.

Based on CLLS guidance, the prevailing market view is that PDMRs are permitted to enter into conditional transactions outside a MAR "closed period" where one or more conditions outside the control of the PDMR is satisfied (whether or not the transaction is then completed) during the MAR "closed period", provided that the PDMR does not have inside information at the time of entry into the transaction. However, PDMRs cannot enter into conditional transactions during a MAR "closed period".

In addition, PDMRs can acquire/dispose of shares under share saving schemes/dividend reinvestment plans/trading plans during a MAR "closed period". The CLLS concluded that such acquisitions/disposals are possible provided that the PDMR enters into the scheme/plan outside a MAR "closed period" or prior to 03 July 2016 and has no inside information at that time. However, the PDMR cannot cancel or amend his or her participation during a MAR "closed period".

Q4: Should companies adopt a share dealing code given that the Model Code has been deleted?

Prior to the implementation of MAR, the Listing Rules contained a Model Code which imposed restrictions on dealing in the securities of a listed company. Although the Model Code has been deleted, many companies have retained a voluntary share dealing code that covers areas of the old Model Code, thus going beyond the scope of MAR. Typical voluntary share dealing codes include provisions for obtaining clearance before dealing at all times; prohibiting dealings during prohibited periods which are not closed periods; preventing dealings by persons closely associated during closed periods (who are not caught by MAR); and including specific exemptions for dealing during a prohibited period. Additionally, the AIC recommend that members should adopt a voluntary clearance procedure to monitor PDMR dealings and facilitate notifications and compliance with the MAR closed period.

Disclosure of inside information

Q5: How should inside information be identified in an announcement?

If inside information is required to be announced under MAR Article 17, it is usually sufficient to include a general reference in the announcement such as: “This announcement contains inside information”. Where the announcement covers several different matters that could have been the subject of separate announcements, issuers might need to distinguish between what is and what is not inside information.

Q6: Does the fact that interim results are in line with market expectations constitute inside information?

Inside information is defined under MAR as “information of a precise nature, which has not been made public, relating directly or indirectly to one or more issuers or 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 ….”

MAR Article 7(4) states that information that is likely to have a significant effect on share price shall mean information a reasonable investor is likely to use as part of the basis for his or her investment decisions.  But, in fact, these definitions are almost identical to Article 1(2) of 2003/124 EC (MAD) and section 118C(6) FSMA so the test as to what amounts to inside information is unlikely to have changed.  We would expect that previous case law, such as the Upper Tribunal’s statements in Hannam, will remain applicable.

What appears to throw this issue into sharp relief is that now companies need to decide whether or not an interim results announcement may constitute inside information for the purposes of identifying it as such in accordance with MAR.  So the question comes down to whether the fact that interim results are in line with market expectations would have a significant effect on share price and what should be taken into account when deciding what that means.

Following Hannam, the approach taken by the FCA that the ‘reasonable investor’ test provides an exhaustive definition of when information is inside information, and which was rejected by the Upper Tribunal, is unlikely to apply. The likely effect on the price of a listed security is something to be taken into account in assessing whether a reasonable investor would use the information for its investment decisions.  On this basis, we understand that a large number of companies are proceeding with existing practices i.e. not to identify interim results announcements as inside information where they are in line with market expectations and there is no expectation that they will have a significant effect on the prices of the relevant financial instruments. 

However, the position is far from clear-cut, and market practice since 03 July 2016 is mixed. The decision in each case is likely to be subjective and will depend on the particular circumstances of the company, including for example how the share price has moved historically in response to an interim results announcement which was in line with market expectations.   This may be an area where additional clarification is needed from the FCA.

Fund MAR Queries

Q7: Who is a PDMR of a fund?

In general:

  • external fund management companies are not PDMRs as they are not a director or senior manager
  • individual fund managers are not PDMRs, unless they are also a director and,
  • if an individual fund manager is also a director, and he/she controls his/her fund management company, the fund management company will be considered a “person closely associated” to the fund manager and dealing restrictions will therefore also apply to the company.

Q8: Can companies continue to use a blanket order cancellation policy as a prudent way of dealing with trading restrictions on coming into possession of inside information?

The FCA has informally indicated at recent industry meetings that it has no philosophical objection to firms applying a blanket cancellation policy. However, the FCA said it could not formally confirm its view unless ESMA provides some guidance on this point via Level 3 Q&A. Consequently, while the risk of enforcement action by the FCA in relation to cancellations under blanket cancellation policy is relatively low, other EU regulators may not take the same approach (especially given that MAR clearly states that there is a presumption that cancellation of an order while in possession of inside information equates to use of that information). Therefore, in the absence of formal pan-EU guidance, a blanket cancellation policy carries risks.

Market Manipulation

There has been a marked increase in enquiries around the use of algorithms and whether they may give rise to the risk of being regarded as abusive practices under the new MAR regime.  Of course, market manipulation under the old FSMA section 118 rules always embodied the use of algorithms but the express inclusion of trading by electronic means, such as algorithmic and high frequency trading strategies in Article 12 of MAR, appears to have brought certain practices into focus.  Many market participants have taken this opportunity proactively to consider the use of algorithmic trading and its effects to examine whether any aspect of it may amount to market abuse.

Q9: The trading we have been doing is something everyone else does and is ‘market practice’ - does this mean we fall within a MAR exception?

Article 13 does provide that certain activities will fall outside the scope of market manipulation provided that it conforms with an accepted market practice as established by Article 13. This permits a competent authority to establish a market practice taking into account certain criteria, such as providing transparency to the market, ensuring a high degree of safeguards and not creating risk to the integrity of the market.  However, as at the date of this article, neither the FCA nor any European regulators have established any accepted market practices under this provision.

Q10: If the market hasn’t actually moved as a result of a particular abusive practice, is that a sufficient defence?

The MAR regime makes it explicitly clear that engaging in "or attempting" to engage in market manipulation is prohibited.  Accordingly, it is unlikely that it will be a sufficient argument to say that no market movement in fact occurred when the practice itself is regarded as manipulative.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.