The Market Abuse Regulation: Key considerations for UK listed issuers

The provisions of the Market Abuse Regulation (MAR) will apply with effect from July 3, 2016. This will involve a number of changes for listed issuers, including in relation to areas such as disclosure of inside information to the market, maintenance of insider lists and disclosure of/restrictions on dealings by directors and persons discharging managerial responsibilities (PDMRs).¹

Although there are still areas where consultations are ongoing and/or further guidance is expected, to the extent they have not already started to do so, listed companies² need to consider the implications of the new rules, in particular in relation to their systems and controls.

Update: See also our subsequent briefing on Policy Statement 16/13 published by the FCA in April 2016 and the statement by the FCA made in May 2016 setting out its approach to closed periods and preliminary results under MAR.

A checklist is included at the end of this briefing setting out some of the initial practical steps that companies should consider in relation to their existing systems and controls relating to public disclosure of inside information, maintenance of insider lists and PDMR dealings.

The definition of “inside information” under MAR is similar to the current definition under the Financial Services and Markets Act 2000 (FSMA), and the FCA has noted that the wording of the definition is materially unchanged.³ As currently the information must, amongst other things, be precise⁴ and must, if made public, be likely to have a significant effect on price (in this context the reasonable investor test has been reinforced – i.e. information likely to have a significant effect on price means information a reasonable investor would be likely to use as part of the basis of their investment decisions). MAR does specifically provide that intermediate steps of a process may, of themselves, constitute precise or inside information, however this is in line with previous case law in relation to the Market Abuse Directive.

We do not expect to see any material change in companies’ approach to determining whether information is inside information or not, particularly in light of recent decisions such as Hannam⁵ which have made it clear that the threshold is already set at a relatively low level.

Overview of key MAR requirements

As is currently the case under Chapter 2 of the Disclosure and Transparency Rules (DTR 2), companies will be required to disclose inside information directly concerning them to the market as soon as possible. Inside information that has been publicly disclosed must also be posted on the issuer’s website for a period of at least five years (this is longer than the one year period currently required under DTR 2).

Delaying disclosure

Companies will continue to be able delay disclosure where it would be likely to prejudice their legitimate interests (subject to the caveats, as currently, that this is not likely to mislead the public and that confidentiality can be maintained).⁶

In January 2016, ESMA published a consultation paper on, amongst other things, draft guidelines in relation to circumstances where an issuer may have a legitimate interest in delaying disclosure and situations when delayed disclosure would be likely to mislead the public. Broadly speaking, the (non-exhaustive) list of circumstances where an issuer may have a legitimate interest in delay is in line with examples contained either in the current Market Abuse Directive or in previous guidance published by CESR (ESMA’s predecessor).⁷ ESMA is, however, proposing to remove the more general reference to legitimate interests in delay including “impending developments that could be jeopardised by premature disclosure” on the basis that the language is too generic. The three circumstances ESMA has identified where delay is likely to mislead the market are: where the information is materially different from a previous announcement made by the issuer on the matter the inside information relates to; where the information relates to the fact that the issuer’s financial objectives (where previously publicly announced) are not likely to be met; and where the information is in contrast to the market’s expectations (where such expectations are “based on signals that the issuer has previously set”). The consultation closes on March 31, 2016.

Where disclosure has been delayed, the starting position under MAR is that the company must (immediately after it discloses the relevant inside information to the market) notify the competent authority that disclosure was delayed and provide a written explanation of how the conditions permitting delay were met. However, competent authorities have the ability to provide that the written explanation only needs to be given if requested. The FCA has indicated (in Section 2 of its consultation on policy proposals and handbook changes related to the implementation of MAR (CP 15/35)) that the current preference of it and the Treasury is to take this approach – i.e. although notification of the delay in disclosure would be required after the event in all cases, the written explanation of how the conditions for delay were satisfied need only be provided on request. This is helpful insofar as it aims to reduce the administrative burden on companies; however as discussed further below, the record keeping requirements that will apply where disclosure is delayed are quite extensive.

Content/format of notification

Supplementary provisions in relation to disclosure of inside information are set out in a draft Regulation contained in Annex XII to ESMA’s final report on draft technical standards on MAR (Final Report on Technical Standards).⁸ These cover areas such as:

• The means by which inside information should be disclosed.
• Contents requirements for the relevant communication – these include, amongst other things, a requirement to clearly identify that the information communicated is inside information.
• Provisions relating to the posting of inside information on the company’s website – including, amongst other things, a requirement that this must allow users to locate the inside information in an easily identifiable section of the website and that the information clearly indicates the date and time of disclosure and is organised chronologically.
• The contents of the notification to be made to the competent authority where disclosure has been delayed including, amongst other things, the date and time of the decision to delay disclosure.
• Record keeping requirements where a decision is taken to delay disclosure.

Record keeping

In terms of record keeping requirements where disclosure is delayed, the information required to be retained by companies includes:

• The dates and times when: the inside information first existed within the issuer; the decision to delay was made; and the information is likely to be disclosed.
• The identity of the persons responsible for: deciding the start/likely end of the delay; ensuring on-going monitoring of the conditions for delay; deciding about public disclosure of the inside information; and providing requested information about the delay to the competent authority.
• Evidence of the initial fulfilment of the conditions for delaying disclosure and of any change to this fulfilment ⁹during the period during which disclosure is delayed, including information barriers which have been put in place to restrict access ¹⁰and arrangements put in place in cases where confidentiality is no longer ensured.

The recitals to the draft Regulation note that companies will be expected to have in place appropriate procedures and arrangements ensuring the process for delaying disclosure of inside information is managed effectively. In its Final Report on Technical Standards, ESMA notes that companies are expected to have in place a minimum level of organisation/process to assess whether information is inside information and whether disclosure is permitted to be delayed, including appointing persons within the issuer responsible for taking the relevant decisions. Ongoing monitoring should also be undertaken during the period of delay to ensure that the conditions permitting delay (including the confidentiality of the information) continue to be fulfilled.

Overview of proposed changes to DTR 2¹¹

CP 15/35 sets out the changes to DTR 2 that are currently proposed by the FCA. The majority of these involve the deletion of provisions considered equivalent to those contained in MAR and their replacement with a signpost to the relevant MAR provision(s). Certain of the guidance contained in DTR 2 (in particular in relation to identifying inside information, legitimate interests in delaying disclosure, selective disclosure and dealing with rumours) is proposed to be retained, subject to minor amendments, as the FCA does not consider it to be inconsistent with the provisions of MAR. The FCA may, of course, propose further modifications to DTR 2 to reflect the outcome of the ESMA consultation referred to above on circumstances where an issuer may have a legitimate interest in delaying disclosure and situations when delayed disclosure would be likely to mislead the public.

Our thoughts

Although listed companies will already have processes in place for assessing and handling disclosure of inside information, these will need to be reviewed to ensure that they are consistent with the revised position under MAR. In particular, the record keeping and process requirements that apply where disclosure is delayed are relatively extensive, and companies may want to think about preparing outline templates that can be used to ensure appropriate contemporaneous records are kept that satisfy these requirements. Where disclosure is delayed, companies should also ensure that their procedures provide for ongoing monitoring of the continued satisfaction of the conditions for delaying disclosure. As currently, where companies decide that information is not (or is not yet) inside information, they should also ensure that this decision is appropriately documented as this will be important in the event that any queries are subsequently raised by the FCA.

Where companies do not already have a disclosure committee, consideration should be given to putting one in place or otherwise ensuring that internal processes are formalised and there is clarity on who is responsible for taking decisions around disclosure of inside information and, in particular, decisions to delay disclosure.

Companies should also review their website and associated processes to ensure compliance with the new MAR requirements (in particular the requirement to retain published inside information on the website for at least five years).
More generally, it is unhelpful that ESMA has indicated it does not intend to publish its final report until early in Q3, as we assume this may have an impact on the timing of any consequential amendments to the relevant provisions of the DTRs.

Overview of key MAR requirements

As is currently the case, insider lists will need to be maintained by companies and their advisers and must be provided to the competent authority on request. The relevant provisions of MAR in this area are supplemented by the draft Regulation set out in Annex XIII to ESMA’s Final Report on Technical Standards. Detailed templates are provided for keeping insider lists, and the personal information required to be included in these is much more wide-reaching than is currently the case. This includes, amongst other things, the relevant individual’s:

• birth surname(s) (if different from current surname(s));
• date of birth;
• national identification number (if applicable – ESMA recognises that not all Member States have a national identification number); and
• personal home and mobile telephone numbers and personal address.

The draft Regulation permits companies to maintain insider lists in two sections - one setting out details of the individuals with access to specific pieces of inside information (for example those individuals with knowledge of a particular event or proposed transaction) and the other including so-called permanent insiders.

It should also be noted that MAR insider lists must include the time at which (not just the date on which) individuals obtained access to inside information (or, in the case of permanent insiders were added to the permanent insider list) as well as their function and reason for being an insider.

Overview of proposed changes to DTR 2

In CP 15/35 the FCA is proposing the deletion of the current provisions on insider lists contained in DTR 2.8 and their replacement with signposts to the equivalent MAR provisions.

Our thoughts

Again, although listed companies will already have processes in place for creating and maintaining insider lists, these will need to be reviewed and updated to ensure that they are consistent with the requirements of MAR.

As a starting point, companies will need to consider the extent to which the necessary information is available in (and can be easily extracted from) their existing systems. Where information is not available, thought should be given to the best way of obtaining this and whether any consents or approvals will be required from individuals in order to comply with local data protection or similar requirements.

In practical terms, the initial focus should be on obtaining this information in respect of potential “permanent” insiders (e.g. directors and other relevant members of senior management) and those on insider lists for any existing transactions which are unlikely to announce prior to MAR coming into effect. However, more generally, consideration will need to be given to the best way of integrating the process for gathering the necessary information in respect of other relevant individuals into the company’s existing systems and procedures and how the information gathered will be stored and updated.

Companies will also want to obtain appropriate confirmations from their advisers that they will comply with the MAR requirements in relation to insider lists. In this context, guidance from the FCA on the information companies are required to keep on their own insider lists in relation to advisers would also be helpful, as the position under MAR is less clear than under the current rules.

Perhaps the widest ranging changes for listed companies are the provisions of MAR relating to disclosure of, and restrictions on, 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 restrictions on trading during “closed” periods set out in a draft delegated Regulation (Draft Regulation) published by the European Commission in December 2015 (following on from ESMA’s final report setting out technical advice on possible delegated acts concerning MAR (Final Report on Delegated Acts)). The draft Regulation set out in Annex XIV to ESMA’s Final Report on Technical Standards also sets out further requirements relating to the format and template for notification and disclosure of transactions.

Disclosure – overview of key MAR requirements

As is currently the case under DTR 3, directors and other PDMRs will be required to disclose certain dealings to the market, as will their closely associated persons (CAPs).¹²However, there are a number of important differences from the current regime.

MAR introduces a de minimis threshold below which transactions will not require disclosure. This is set at €5,000 per calendar year (note that this should be calculated without netting of transactions). There is flexibility under MAR for competent authorities to increase this threshold (up to €20,000), however in CP 15/35 the FCA has indicated that it does not intend to do this.

The timelines and process for making disclosure have also changed. Under MAR, the PDMR/CAP must make disclosure promptly and within three business days of the date of the transaction (rather than the four business day period currently set out in DTR 3). Disclosure must be made using a specific template ¹³(although the FCA does currently have a template, its use is not mandatory) and must be submitted to the competent authority at the same time as to the issuer. Unhelpfully, the period for the issuer to make notification to 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 where the PDMR/CAP only makes notification to the issuer at the end of the period. ESMA has acknowledged this potential issue, but notes it does not have power to rectify the discrepancy given it is contained in the text of MAR itself.

Disclosure is required in respect of “own account transactions” relating to shares or debt instruments of the issuer or derivatives or other financial instruments linked thereto (currently DTR 3 only refers to shares and related derivatives/financial instruments). The types of transactions required to be disclosed are also wide-ranging. A non-exhaustive list of types of transaction is set out in Article 19 of MAR and Article 10 of the Draft Regulation. This includes, amongst other things, transactions executed by a third party under an individual portfolio or asset management mandate on behalf of or for the benefit of a PDMR/CAP, gifts and inheritances, lending/borrowing transactions, entering into or exercise of equity swaps, entering into CFDs and the conversion (including automatic conversion) of a financial instrument into another financial instrument (including the exchange of convertible bonds to shares).
Under amendments proposed to Article 19 of MAR, ¹⁴notification will not be required where, at the time of the transaction, the financial instrument:

• Is a unit/share in a collective investment undertaking in which exposure to the issuer’s shares or debt instruments does not exceed 20% of the assets held by the collective investment undertaking.

• Provides exposure to a portfolio of assets in which the exposure to the issuer’s shares or debt instruments does not exceed 20% of the portfolio’s assets.

• Is a unit/share in a collective investment undertaking or provides exposure to a portfolio of assets and the PDMR/CAP does not know (and could not know) the investment composition or exposure in relation to the issuer’s shares/debt instruments and there is no reason for them to believe the 20% threshold is exceeded.¹⁵

Article 19 of MAR is also proposed to be amended to clarify that subsequent transactions in the issuer’s securities by the manager of a collective investment undertaking in which a PDMR or CAP has invested do not need to be notified provided the manager operates with full discretion.

Closed periods – overview of key MAR requirements

MAR includes a prohibition (subject to limited exceptions) on PDMRs (this prohibition does not extend to CAPs) conducting any transactions on their own account or for the account of a third party during a “closed period” of 30 calendar days before the announcement of an interim financial report or year-end report which the issuer is obliged to make public under the rules of the trading venue where its shares are admitted to trading or national law. ¹⁶The terminology (transactions on own account) is essentially aligned with that used in the context of disclosure of PDMR/CAP dealings, although it is unclear how the closed period prohibition will operate in respect of transactions over which the PDMR has no control (for example, automatic conversion or vesting) and further guidance from the FCA in this area would be helpful.

This definition of “closed period” in MAR differs from the provisions of the Model Code in various ways. For example, the 30 day period is shorter than the Model Code provisions relating to year-end reports (currently 60 days or, if shorter the period between the end of the financial year and publication) and half-year reports (currently the period between the half-year end and publication). It is not entirely clear how the rules will apply where companies produce preliminary results announcements and whether this will end the closed period (as is currently the case under the Model Code). It will be important for the FCA to provide additional guidance in this area prior to the revised rules coming into effect.

It is also worth noting that, unlike the concept of a prohibited period under the Model Code, the prohibition under MAR does not extend to other periods where the company is in possession of unpublished inside information (although dealing by insiders during these periods would of course be restricted by the more general application of the rules around insider dealing).

MAR does envisage that certain transactions should be permitted during a closed period either:

• On a case-by-case basis as a result of exceptional circumstances, such as severe financial difficulty, which require the immediate sale of shares (this is very similar to the current exemption under the Model Code).

• Due to the characteristics of the trading involved for transactions made under, or related to, an employee share or saving scheme, qualification or entitlement of shares, or transactions where the beneficial interest in the relevant security does not change. The list of specific exceptions contained in the Draft Regulation in this context (although expressed to be non-exhaustive) is narrower than the list of exemptions that currently apply under the Model Code. For example, it does not include specific exemptions relating to acceptances of takeovers or rights issues.

Overview of proposed changes to the Model Code and DTR 3

In CP 15/35 the FCA has proposed a number of changes to the Listing Rules and to DTR 3 in order to reflect the requirements of MAR. In particular, the FCA intends to delete the Model Code and replace it with a new requirement for premium listed companies to have effective systems and controls in place regarding the process for PDMRs obtaining clearance to deal.¹⁷

Factors to be taken into account by the FCA when considering whether a company’s systems and controls satisfy this requirement are proposed to be set out in a new Annex to Chapter 9 of the Listing Rules. The guidance is broadly procedural in nature, with the question of whether clearance can be granted during a closed period to be decided in accordance with MAR. However, it does note that, where the dealing is proposed to take place outside 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; and
• whether, due to the specific nature of the dealing or the circumstances facing the PDMR, it merits exceptional treatment.

The FCA has noted that it is difficult to maintain the current Model Code provisions in relation to dealings by connected persons (on the basis that, as mentioned above, the closed period restrictions under MAR are only expressed to apply to PDMRs). Whilst it has not included provisions in this area, the FCA does note that it would welcome observations or suggestions on this point.¹⁸

Other proposed amendments to the relevant UK rules include:

• The deletion of the majority of the provisions of DTR 3 and the inclusion instead of signposts to the relevant provisions of MAR.¹⁹
• The deletion of LR 9.2.7 which imposes restrictions on premium listed companies’ own dealings during periods when, under the provisions of the Model Code, a director would be prohibited from dealing. The FCA notes that due to MAR and the FCA’s proposals in respect of the Model Code it is not possible to maintain this rule in its current form.²⁰

Our thoughts

We expect that there will be some pushback on the FCA’s proposals in relation to the Model Code, given that they introduce additional restrictions not required under MAR but arguably do not provide companies with sufficiently concrete guidance on what is expected. Possible alternative approaches could include permitting individual companies to determine what restrictions they consider it appropriate to apply outside of MAR closed periods or, if additional restrictions are imposed under the Listing Rules, providing clearer and more specific guidance on the form and content of codes companies should adopt (if the latter route is taken, one possibility could be the development of an industry standard or FCA endorsed code). As mentioned above, guidance on the application of the closed period prohibition to transactions over which PDMRs have no control is also needed (as it is currently unclear how this would operate in practice) as is greater clarity on the relationship between current Model Code exemptions and the exemptions to MAR closed periods.

As a first step, companies will need to ensure that their PDMRs are briefed on the revised rules (and, in due course, formal communications to PDMRs and CAPs in respect of the new rules will need to be prepared once the relevant rules are finalised). It would also be sensible for PDMRs and their CAPs to review their existing investment arrangements and identify any areas that may be complex or problematic under the revised regime so that these can be considered in more detail in advance of the new rules coming into effect. PDMRs should be encouraged to review their list of connected persons to identify whether any changes will be required in light of the CAP definition under MAR. Companies may also want to take this opportunity to review their policy in respect of designating individuals as PDMRs and their lists of non-director PDMRs to ensure that they remain up-to-date.

Notwithstanding that it will be difficult to finalise the details until the final rules in this area have been published by the FCA and industry bodies have commented, companies should also start to consider the likely form and content of their revised share dealing code . Some areas for consideration include:

• Obligation to notify transactions: Although MAR only requires notification to be made to the company (and the market) where the €5,000 threshold is crossed, given the low threshold will it be simpler or more appropriate to require all transactions by PDMRs/CAPs to be notified to the company and announced to the market as under the current rules? If not, who will be responsible for monitoring when the threshold has been reached – will this be done centrally or left to the individual PDMRs?
• In light of the draft guidance that companies may want to consider whether there are timeframes during the year (outside of MAR closed periods) 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 to include an additional restricted period prior to commencement of the MAR closed period (e.g. a further 30 days in respect of year-end results to mirror the current 60 day period under the Model Code).
• Timelines for notification of dealings to the company: Will the dealing code impose a shorter deadline than MAR (for example one or two business days) to ensure that the information is provided with sufficient time for the company to meet its own disclosure deadline?
• Obligations on PDMRs in respect of their CAPs: Do companies want to retain certain provisions even if they will no longer be required under MAR/the revised Listing Rules? For example, although the MAR closed periods only apply to PDMRs, companies should consider whether it would be appropriate to retain provisions requiring PDMRs to seek to prohibit dealings by their CAPs during a closed period.
• Application of the code: Companies that currently apply the Model Code to individuals other than directors/PDMRs should consider whether, in light of the more extensive and less flexible nature of the new regime, it would be appropriate to continue with this approach or to produce a separate form of dealing code/process for these individuals.
• The procedures and timelines for requesting/granting clearance to deal.

Where companies have multiple listings, they will also need to look at whether any changes are compatible with the requirements of their other exchanges and whether any consultation or discussion will be required with the relevant listing authorities.

As summarised above, the new rules involve a number of extensive changes to the current requirements. Although consultations remain ongoing in various areas, given the July timeframe, companies need to start looking at the changes they will need to make to their systems and controls even though the detail of these may need some fine tuning once final rules and guidance have been produced. To assist in-house and company secretarial teams with this process, we have included below a list of initial practical steps to consider.

This note is only intended to provide an overview of the key changes – to the extent you have any further questions or detailed queries about how these rules will impact on your systems and controls, please let us know.