Preparing for MAR

What’s next for the EU Market Abuse Regulation? Anne Kirkwood, professional support lawyer at Herbert Smith Freehills, explains the new technical guidance.

Original news

ESMA clarifies market abuse requirements LNB News 03/02/2015 121

Enhanced disclosure of managers’ transactions under the Market Abuse Regulation (EU) 592/2014 (MAR) is clarified in technical advice submitted to the European Commission by the European Securities and Markets Authority (ESMA). The advice is the first such submission concerning MAR implementation. Other issues addressed include procedures to ensure sound whistleblowing infrastructures and MAR market manipulation indicators. ESMA confirms it will submit the MAR regulatory technical standards in July 2015.

What are the main areas of interest in these recommended technical standards?

The new MAR will introduce a new regime for market abuse in tandem with new rules on the disclosure of inside information, insider lists and restrictions on share dealings by persons discharging managerial responsibilities. ESMA recently published the first of its final reports to the European Commission setting out its recommendations on some of the measures required to implement MAR. This report follows one of the two consultation papers on MAR issued by ESMA in July 2014.

One of the key topics in the final report is share dealings by persons discharging managerial responsibility (PDMRs). A summary of the main points is set out below.

PDMR transactions

Disclosure

The basic concept in MAR regarding disclosure by PDMRs and their connected persons of transactions in securities is the same as it is now under DTR 3, and the definition of PDMRs and connected persons remains the same. However, the scope of transactions to be disclosed has been broadened and the ESMA technical advice provides detail on that scope. The key points in the ESMA response and technical advice are:

• ESMA considers that it must apply a very broad interpretation of MAR’s provisions regarding the types of PDMR (and connected person) transaction which trigger the duty to notify—the current concept that they are limited by reference to transactions which are triggered by the PDMR, or connected person, themselves will not apply, despite the language of ‘own account’ dealings being the same as under the current regime
• there is a very wide ranging, but still non-exhaustive list, of transactions which will trigger the reporting requirement
• there is confirmation that conditional trades will not need to be reported, until the condition is satisfied
• in the case of PDMR interests in collective investment schemes managed under a discretionary investment mandate, ESMA’s technical advice helpfully clarifies which dealings in undertakings for collective investment in transferable securities (UCITS)/AIFs will be caught, and confirms that the PDMR disclosure requirements and trading restrictions are not intended to apply to transactions by UCITS/AIFs in which the PDMR holds an interest and which are managed on a fully discretionary basis
• there is a recognition of the problem created by the fact that an issuer is required to announce the transaction within three business days, which is the same as the deadline for the PDMR/connected person to make the disclosure to the issuer, but ESMA says that, as this is in MAR itself, it has no remit to modify the requirement

Closed periods

MAR, art 19(11) imposes a prohibition on PDMR dealings during ‘closed periods’, that is 30 days prior to the issue of financial results. The ESMA paper covers the definition of the closed period and the circumstances in which an exception can apply, allowing a PDMR to deal.

Definition of ‘closed periods’

The MAR provision and ESMA’s initial interpretation appeared to preclude the use of a preliminary results announcement to end a closed period (which is the case in the current regime under the UK Model Code). ESMA’s report acknowledges that it has received feedback to the effect that this is potentially a significant issue for UK companies. ESMA indicates that if the preliminary announcement of an annual report is required either by national or trading venue rules, it can end a closed period. This interpretation would therefore suggest that if the FCA decided to make preliminary announcements compulsory again, they would then operate to end the closed period, rather than having to wait for the full annual report. (The current UK position is that a company is not obliged to publish a preliminary announcement of its results but may choose to do so voluntarily under LR 9.7A.)

Basis for any exemption

Trading in closed periods can only be permitted by an issuer if the PDMR is able to demonstrate that the transaction cannot be executed at another moment in time other than during the closed period.

Dealing in exceptional circumstances

ESMA defines very narrowly the criteria for when clearance may be given for PDMR dealings in a closed period in ‘exceptional circumstances’. Circumstances are exceptional only where they are ‘extremely urgent, unforeseen and compelling and where their cause is external to the PDMR who has no control over them’. Account may be taken of the extent to which a PDMR has to meet a financial commitment arising from a legally enforceable demand

Exceptions for certain types of transactions

Exceptions included in the Model Code which permit certain transactions in prohibited periods (eg acceptance of a takeover offer or rights issue during a closed period) are not replicated in ESMA’s technical advice. The exemption for share schemes provided for in MAR is also given a restrictive interpretation in the ESMA technical advice

What should firms be doing to prepare?

UK listed companies, including AIM companies, will need to plan ahead for the MAR, which will take effect on 3 July 2016.

How does this fit into the bigger picture of developments in the financial services sector?

In accordance with the process for Level 2 measures, the Commission can now proceed to adopt the ESMA recommendations. The EU Parliament or Council may object to ESMA’s delegated acts within three months of their adoption by the Commission. If neither objects, the delegated acts will be published in the EU’s Official Journal prior to July 2016.

ESMA’s final report in relation to its second July 2014 consultation paper, covering issues including market soundings, disclosure of inside information, insider lists, accepted market practices, and stabilisation, is due to be published by July 2015 and will then be subject to a similar process of adoption. We are also expecting the FCA to consult in summer 2015 about the implementation of the new regime in the UK.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.