The market abuse regulation (MAR) is fast approaching and will impact not just financial services firms, but also any EU listed company.
Identified in a number of articles published here on RegTech, and discussed at JWG’s CDMG, (customer data management group), which focused on MAR/MAD changes in August last year, the regulation will involve a number of changes for listed issuers, such as changes to the disclosure of information, changes to information required in insider lists and updates to the disclosure of dealings by directors and persons discharging managerial responsibilities (PDMRs).
Here, we highlight changes introduced by MAR and the resulting impacts for issuers under the MAR.
Disclosure of inside information
Under the disclosure and transparency rules (DTR) published by the FCA, firms have to disclose inside information directly concerning the issuer to the market as soon as possible. Whilst this obligation remains the same under the new MAR, disclosures will now need to be posted for a minimum of 5 years, which is significantly longer than the current year.
Again, under DTR, delaying disclosure of inside information remains the same, and companies can continue to do so such as not to prejudice their legitimate interests provided that they do not mislead the public, and the issuer is able to ensure the confidentiality of that information.
However, is it likely that changes will be made to legitimate interests in delay under the DTR, such as “impending developments that could be jeopardized by premature disclosure” on the basis of the statement being too generic. Instead, ESMA has identified three sets of circumstances where delay is likely to mislead the market:
- Where the information is different from a previous announcement made by the issuer on the matter to which the inside information relates
- Where the information relates to the fact that an issuer’s financial objectives are not likely to be met
- Where the information is different to the market’s expectations.
Where disclosure has been delayed, the company should notify this to the competent authority and provide them with a written explanation of how the conditions permitting delay were met. It should be noted that a competent authority is awarded the discretion to change whether the notification is mandatory or made on request, with the FCA indicating that it is likely to implement the latter.
The following information will need to be retained and recorded and, in the UK, supplied on request to the FCA:
- Date and time of when inside information first existed, when the decision was made to delay and when the information is likely to be disclosed
- The identity of the persons responsible for deciding the start/end of delay, the procedures ensuring ongoing monitoring of the conditions for delay, the time of the decision on the public disclosure of the inside information and any requested information about the delay to the competent authority
Of these, the one that is likely to be most challenging is being able to identify the precise time the inside information first existed.
Proposed changes to the FCA disclosure and transparency rules
Under the DTR, the majority of the changes proposed by the FCA, as set out in CP 15/35 which outlines changes to the FCA handbook resulting from the implementation of MAR, consist of deletions or provisions considered to be equivalent to those set out in MAR. For those elements that are retained, such as provisions relating to identification of insider information or delaying disclosures, the FCA has stated that they do not consider them to be inconsistent with MAR.
But a qualification should be made. The FCA may still change, or propose further modifications, once ESMA has published the outcome of the consultation on the draft guidelines on the market abuse regulation which is due to close on the 31 March 2016.
Insider lists, drawn up under the DTR, naming persons working for the issuer who have access to insider information, relating directly or indirectly to the issuer, will need to be maintained and sent to the competent authority on request. Detailed templates are provided for keeping insider lists, and the new requirement for personal information is much more detailed than previously.
Of particular note is the requirement of companies to record the time at which individuals obtained access to inside information, as well as their function and reason for being an insider. The time element will be need to be precisely logged requiring clear policies and procedures to ensure robust and precise recording of such information.
What is changing in relation to director and PDMR dealings?
The greatest changes for listed companies are the provisions relating to disclosure of dealings by directors and other PDMRs. The primary provisions are set out in Article 19 of MAR, with further guidance on the types of transactions required to be disclosed and the restrictions on trading during ‘closed’ periods set out in a draft delegated regulation published by the European Commission in December 2015. This draft regulation sets out further requirements relating to the format and template for notification and disclosure of transactions.
As is currently the case under the DTR, PDMRs are required to disclose certain dealings, as are their “closely associated persons” as defined under MAR, which are different to “connected persons” under the DTR. Due to the change from “connected persons” to “closely associated persons”, companies should review their position before the new rules come into force on 3 July 2016. Changes made include the introduction of a minimum threshold of 5000 EUR per calendar year, below which transactions will not be required to be disclosed, although there is flexibility for the competent authority to increase this. With the threshold being so low, it is possible that companies will choose to ignore it and simply report regardless of amount, considering it less burdensome that putting in systems and controls for de minimus thresholds.
Moreover, under MAR, the timeliness and process for making disclosure has also changed. Now, the disclosure must be made within three business days, as opposed to the current four, using a specific template and must be made to the issuer and the competent authority at the same time. The period for the issuer to notify the market is also calculated by reference to the date of the transaction, rather than the date of notification by the PDMR/CAP to the issuer. As a result, these two periods (both of three business days) run concurrently rather than consecutively, which could cause problems if the PDMR/CAP only makes notification to the issuer at the end of the period.
Proposed changes to the model code and DTR3
The FCA has proposed a number changes to the UK Listing Rules, which listed companies should abide by, and to the DTR. The FCA intends to delete the Model Code, which currently states that PDMRs should not be given clearance to deal in the relevant issuer’s securities during closed periods, and replace it with a requirement for listed companies to have effective systems and controls in place for the process of PDMRs obtaining clearance to deal.
The FCA, when considering whether a company’s systems and controls satisfy the requirement, are proposing a new Annex to Chapter 9 of the Listing Rules. If a deal is to take place during a MAR closed period, the company may (in deciding whether to grant clearance) want to consider factors such as:
- Whether it is appropriate to grant clearance where inside information exists in relation to the company
- If inside information does not exist, whether there are timeframes during the year in which it would not be appropriate to give clearance due to the perception of shareholders or the market that inside information may exist
- Whether it is appropriate to give clearance to deal where the request is based on considerations of a short term nature
- Whether, due to the specific nature of the dealing or the circumstances facing the PDMR, it merits exceptional treatment.
Clearly MAR will introduce change for financial services and listed companies, much of which will involve implementing new systems and controls for record keeping and reporting. With MAR fast approaching, listed companies and financial services firms awaiting ESMA’s publication of the consultation after 31 March might just find they still have a lot to do.