How New European Union Market Abuse Rules Affect US Firms

July 5th, 2016

An Article by Charles Hastie, Regulatory Head, Clutch Group has been published by Law360. In it, Hastie reviews some of the high-level changes introduced by MAR as well as its impact on U.S. firms. The article is available here on Law 360’s website. An excerpt of the article is available below. 

How New European Union Market Abuse Rules Affect US Firms

Law360, New York (July 5, 2016, 11:27 AM ET)

On July 3, 2016, new market abuse rules came into force across Europe, under the Market Abuse Regulation, or MAR. The regulation represents an updating and broadening to the existing market abuse regime (the Market Abuse Directive, or MAD) in force since 2003. The overall objective is to increase market integrity and investor protection in a way that is consistent across the European Union to ensure a level playing field.

This analysis is intended to be a high-level guide to the instruments and behaviors MAR covers as well as the new requirements it places on organizations, and to assess the extraterritorial scope of MAR. There are circumstances in which the regulation imposes onerous obligations on U.S. issuers of securities and the market participants who trade them.

Extraterritorial Impact of MAR on American Firms

U.S. securities issuers and traders should be aware of the significant extraterritorial aspects of MAR.

MAR’s predecessor, MAD, had extraterritorial effect. A U.S. company with securities listed on a regulated market in the E.U. would have to abide by the rules on disclosure of inside information, for example.

MAR takes this further. It expressly states in Article 2(4) that the prohibitions and requirements of MAR capture any actions and omissions in the EU and also in a third country, where they relate to financial instruments captured by the regime. The expansion of scope under MAR to financial instruments traded on MTFs brings in a large number of securities that previously fell outside of the regime.

This impacts both the U.S. issuers of those securities and U.S. traders of those securities.

Issuers to Face the Most Significant Extraterritorial Impact

The most significant extraterritorial impact is likely to be on the issuers of securities where those securities are not currently traded on a traditional EU exchange, but are traded on an MTF. This may be particularly relevant to debt instruments as many non-E.U. companies, including U.S. issuers, list their debt on European MTFs (multilateral trading facilities), such as the Luxembourg Euro MTF.

Moving forward, the issuers of these securities will be captured under MAR. They will find that they are not only required to comply with disclosure and other obligations, but that the requirements have been significantly broadened under the new regime.

1. Obligation to Disclose Inside Information

One of the overriding objectives of MAR is to prevent insider dealing. The new regime, in a manner similar to that of its predecessor, MAD, will achieve its objective by requiring that inside information be made public, through the issuer disclosure rules.

The core requirement is that a securities issuer publicly disclose inside information relevant to the issued security as soon as possible.

An issuer may delay disclosure where it is in its legitimate interest (an example might be where disclosure of a proposed takeover might jeopardize negotiations). However, MAR puts into place a new requirement necessitating that the issuer notify the national regulator of the relevant trading venue that disclosure was delayed and provide a written explanation of the rationale for the delay.

2. Obligation for Directors and Other Senior Staff to Disclose Dealings in Issuer Securities

The core obligation to disclose publicly any dealings by a PDMR (person discharging managerial responsibilities) in his or her company’s own securities is a carry-over from MAD.

However, the notification to the market and to the local regulator must be made within three days of the transaction, rather than four, and the notification requirements run concurrently.

MAR also prohibits PDMRs from dealing during a closed period of 30 days before the announcement of an interim or year-end financial report.

3. Unlawful Disclosure and Market Soundings

Where inside information does exist, i.e. there is material information relating to a security that has not been disclosed publicly (whether legitimately or not), MAR makes the selective disclosure of that information unlawful.

MAR defines unlawful disclosure as where a person discloses inside information to another person, except where the disclosure is made in the normal exercise of an employment, profession or duties.

Market soundings, where an issuer approaches investors to establish appetite for a potential M&A transaction, is one example where inside information, legitimately withheld from the market as a whole, can be selectively disclosed in a lawful manner if certain conditions are met.

MAR introduces prescriptive rules for how market soundings are conducted that must be followed if the passage of inside information is to be lawful. These include requirements that the disclosing party determine whether inside information will be passed during the wall-crossing, keep a record of that determination, follow a prescribed script during the sounding, and make a record of what was discussed.

Many of the requirements apply even where the disclosing party considers that they are not disclosing inside information.

The disclosure, PDMR and market sounding requirements are together quite onerous. Issuers who were outside the scope of MAD, but are now captured by MAR by virtue of having an issued security traded on an MTF in the EU, may wish to assess whether delisting the relevant securities from the MTF is more attractive than incurring the costs of complying with the rules.

Charles Hastie is the regulatory head at Clutch Group. He is a former supervisor at the Financial Conduct Authority, where he was responsible for the supervision of a large investment bank. He also worked as an investigator in the FCA’s enforcement division, handling several cases involving market abuse, U.K. Listing Authority rule breaches and FCA principles breaches.