Developments in the new EU Regulation on market abuse

On 3 July 2016 Regulation (EU) No 596/2014 on market abuse came into effect. It mostly aims to establish a common regulatory framework on insider dealing, the unlawful disclosure of inside information and market manipulation, in addition to measures to prevent said market abuse.

The most relevant features of the new Regulation are the following:

• The scope of the Regulation is extended to include other financial instruments that are admitted to trading in multilateral trading facilities (MTFs) and in organised trading facilities (OTFs), as well as spot commodity contracts not related to wholesale energy products and derivatives. 

• The definition of inside information is modified, defining its precise nature, harmonising the definition related to commodity derivatives with the definition related to referred issuers and financial instruments, and introducing a new definition of inside information in connection with emission allowances. 

• Inside information operations are those carried out by a person in possession of this information and that uses it not only to acquire or dispose of financial instruments referred to in said information, but also to cancel or modify an order issued before the person became aware of the inside information. Also, anyone that uses recommendations or inducements to engage in insider dealings when they use or disclose the recommendation or inducement knowing, or having the obligation of knowing, that it is based on inside information.

• The Regulation describes in depth different situations of unlawful disclosure of inside information. These take place when someone in possession of inside information discloses it to a third party and when said disclosure takes place within a market sounding, unless the disclosure takes place under normal work or professional circumstances or in the exercise of their duties.

• A number of behaviours are identified, some of which are, in principle, considered legitimate. For instance, when someone uses inside information that has been obtained during a public takeover or a merger.

• The Regulation homogenizes the disclosure of the inside information delay system. As a general rule, the disclosure of inside information may be delayed if an issuer’s legitimate interests are threatened. The delay must be notified to the competent authority providing a written explanation of how the regulatory conditions have been met, immediately after the information has been disclosed to the public.

• New market manipulation situations have been added. Their definition includes, in addition to transactions and instructions to trade, other activities and behaviours, provided that these have a real impact on the demand or price of a financial instrument.

• A common rule is established to notify any transactions carried out by persons with management responsibilities, as well as anyone closely associated with them. They must notify the issuer and the competent authority of any transactions conducted on their own account relating to the shares or financial instruments linked to them, no later than 3 working days after the date of such a transaction. Additionally, thresholds are set out below which said notification is not needed. Any person discharging management responsibilities within an issuer shall not be able to conduct any transactions during a period of 30 calendar days before the announcement of an interim financial report or a year-end report, unless otherwise provided.

• The Regulation introduces some basic rules concerning administrative sanctions. One of the new sanctions shall be the disgorgement of the profits gained or losses avoided due to the infringement, if these can be determined. In the event of repeated infringement, the Regulation establishes a permanent ban from discharging managerial responsibilities in investment firms.

• For the first time, the Regulation takes care of the person reporting an infringement to the competent authorities. Member States must establish effective mechanisms and suitable protection measures that shall allow reporting any potential or real infractions to the competent authorities.

The new Regulation repeals Directive 2003/06EC of the European Parliament and of the Council, Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC. All of these have been transposed into national law through the current Securities Market Act and Royal Decree 1333/2005, of 11 November, that develops the former Securities Market Act.

The grounds for the current Securities Market Act foresee that, over the next few months, the Spanish Government shall initiate the procedures to adapt the Spanish legislation to the new Regulation which is something that players in this sector will have to monitor very closely.