In December 2018, the FCA published Market Watch No. 58 which outlines the FCA’s findings following a review of the industry’s implementation of the Market Abuse Regulation (MAR), which had a particular focus on the market soundings regime and insider lists.
Going forward, the FCA will continue to work closely with market participants to ensure a consistent, effective implementation of MAR.
The FCA makes various comments in this edition of Market Watch, including:
Compliance with MAR
A reminder that compliance with MAR is more than adhering to a set of prescriptive requirements - it is also a ‘state of mind’ (as outlined in a speech from the Director of Market Oversight at the FCA in November 2017), meaning that it requires critical thinking and a set of skills that staff need to develop.
MAR compliance is most effective where risk assessments are calibrated to markets and asset classes that firms operate in.
Surveillance of quotes, orders and transactions remains an area where firms are still struggling to comply. Over 70% of STORs still relate to equities. The FCA expect surveillance to extend across all asset classes, including fixed income and commodities.
Different models have been adopted for receiving market soundings but the FCA noted with approval the practice amongst investors of appointing a "gatekeeper" to receive the initial approach in a market sounding, as this ensures a consistent approach and minimises the opportunities for information leakage. Firms are advised to consider whether staff receiving sounding approaches are properly trained and aware of their obligations under MAR and related guidelines.
When making the initial no-names approach to see if the market sounding will be accepted, firms should be careful not to give away inadvertently the identity of the issuer or security, particularly when discussing markets that involve few actors.
The FCA notes that a declined "wall crossing" could still convey inside information and reminds recipient firms that they need to consider whether they have in fact been wall crossed and need to apply the relevant controls. This reflects the outcome of the Greenlight/Einhorn case; namely that it is not sufficient, having indicated that you do not want to be wall crossed and provided with inside information, to assume that no such information has been provided. Firms should consider keeping a detailed record of their conversations together with an explanation of why the sounding was declined.
In terms of "cleansing" soundings, the FCA advise firms to agree cleansing strategies (whether they will be public or private) as early as possible ahead of a transaction to be clear in their approach.
The quality of insider lists received to date has been varied. The FCA encourage issuers to:
- ensure all staff with access to inside information are on the list, including anyone who has accessed it according to electronic access logs
- complete all fields in the templates, including relevant personal information, and
- ensure that any permanent insider list does not include too many employees and is restricted to employees who actually have inside information at all times.
The FCA note that intermediaries, including investment banks, only need to provide an issuer with a contact point for any of their employees who are on an issuer’s list and can send a complete list with their employees’ personal information direct to the regulator.
The FCA expect completed insider lists to be returned within two days of a request and a full chronology within five days.
Disclosure of inside information
The FCA reminds issuers of their obligations to maintain adequate procedures, systems and controls to comply with their inside information disclosure obligations under MAR, including identifying and disclosing inside information. These need to be able to identify and assess information outside of normal reporting timetables and in an accelerated manner. Information in, for example, weekly sales reports or monthly management reports that is not in line with market expectations should be investigated immediately and disclosure obligations should be considered.
The FCA notes that issuers are using additional lists, such as confidential/ project/ prohibited dealings lists, to record individuals who may have access to confidential information that has not been deemed inside information.
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.