FREQUENTLY ASKED QUESTIONS ABOUT EUROPEAN SECURITIES LEGISLATION

Who is affected by European securities legislation?

What are the core pieces of European securities

European securities legislation applies not only to

legislation?

European issuers of securities, but also affects:

Under the Financial Services Action Plan, the most





issuers from outside Europe that raise capital

important European legislative provisions in respect of

in Europe through institutional and/or retail

the securities market are the Prospectus Directive, the

offerings;

Market Abuse Directive (“MAD”), the Transparency

issuers

with

Euro

MTN

Programs

(see

“Frequently Asked Questions - European Medium Term Note Programs”) or Euro commercial paper programs; and 

Directive

(“TD”)

and

the

Markets

in

Financial

Instruments Directive (“MiFID”). What does the Prospectus Directive do? The Prospectus Directive creates a single EU-wide

issuers of securities listed on a European

regime governing the content, format, approval and

exchange, such as the London Stock Exchange,

publication requirements for disclosure and offering

the Irish Stock Exchange and the Luxembourg

documents in respect of securities offerings in the

Stock Exchange.

European Economic Area (“EEA”), including the ability to “passport” a prospectus approval from one EEA

What is the framework for European securities legislation?

member state to another. (For details of the provisions of the Prospectus Directive, see “Frequently Asked

The Financial Services Action Plan of the European

Questions - European Medium Term Note Programs.”)

Union (“EU”) was drafted with the intention of creating a single European wholesale capital market which

What does the Market Abuse Directive do?

issuers could access effectively and which would

MAD establishes rules prohibiting insider dealing and

harmonize

market manipulation. MAD applies in respect of all

prudential

rules

European financial services.

and

supervision

in

financial instruments (as defined below) which are under the auspices of a “competent authority” of an EU member state (such as the UK’s Financial Conduct

Authority, in the case of securities listed on the

provisions that already existed under UK law before

regulated market of the London Stock Exchange).

MAD.

The following pages pose frequently asked questions

What are “financial instruments” in this context?

in relation to MAD as it stands today. However, on

“Financial instruments” include securities which are

16 April 2014, the Council of the European Union formally

adopted

a

revised

legislative

negotiable on the capital markets, units in collective

package

investment undertakings, money-market instruments,

governing market abuse, consisting of the Market

financial futures contracts (including equivalent cash-

Abuse Regulation (commonly referred to as MAR) and

settled instruments), forward interest-rate agreements,

the Criminal Sanctions for Market Abuse Directive (commonly referred to as CSMAD)).

interest-rate, currency and equity swaps, options to

The aim and

acquire or dispose of any of the foregoing (including

purpose of these legislative changes are primarily to

equivalent cash-settled instruments), and commodity

update and strengthen the market abuse regulatory

derivatives. This is a broader category than “securities”

framework, while at the same time ensuring that the

which are subject to the insider trading prohibition

framework is consistent with the proposed new MiFID

under Rule 10b-5 of the U.S. Securities and Exchange

II regime (see “What does MiFID do?” below), in terms of

Act of 1934, as amended. Since MAD is a minimum

the instruments and markets that are within the scope of

harmonization directive, individual states are free to

the two regimes. Among other things, these legislative

adopt

changes bring the manipulation of benchmarks within

an

even

broader

definition

of

financial

instruments.

the scope of the legislation, and make the manipulation of markets a criminal offence. MAR becomes effective

The term “regulated market” is defined by statute and

on 3 July 2016 and will automatically apply in all EU

each EEA member state is required to publish a list of

member states from this date. By the same date, EU

the regulated markets operating in its jurisdiction. The

member states must transpose the CSMAD’s provisions

UK regulated markets currently include the London

into national law. However, the United Kingdom has

Stock Exchange – Regulated Market, LIFFE, EDX,

exercised its power, granted as a result of its special

London Metal Exchange, ICE Futures Europe, SWX

position under the Lisbon Treaty, to opt out of measures

Europe Limited and the PLUS-listed market operated

governing EU criminal law and as such has not adopted

by PLUS Markets plc. However, when it becomes effective, MAR will

CSMAD. MAD is a minimum harmonization directive, meaning

expand the scope of “financial instruments” by

that it provides minimum standards of conduct in

borrowing the broader definition to be introduced by

respect to financial instruments.

the MiFID II Directive.

Each EEA member

This definition will also

state is free to implement provisions into its national

encompass instruments traded on other venues, such as

law which are additional to, or more stringent than, the

multilateral trading facilities and organised trading

provisions of MAD. For example, the United Kingdom

facilities, as well as instruments that may be traded off-

has used this feature to retain additional market abuse

market but can have an effect on such instruments.

2

What is the European definition of “insider dealing”?

whether non-public information constitutes “material”

The insider dealing regime under MAD prohibits:

non-public information. In practice, U.S. and European



lawyers often analyze these issues in a relatively fact-

dealing or attempting to deal in financial

specific

instruments on the basis of inside information;

manner,

as

the

impact

of

the

public

dissemination of information upon the market price of a 

disclosing inside information other than in the proper

course

of

such

person’s

security cannot be known for certain prior to disclosure.

duties As noted above, individual EEA member states are

(regardless of whether it leads to a trade); and 

free to adopt more far-reaching definitions of “inside

recommending or inducing another person to

information” and “financial instruments,” so the exact

do any of the above.

scope of obligations of an insider or a related person would be decided by the laws of the relevant EEA

In this context, for the behaviour to be prohibited, it is

member states.

not necessary for the relevant person to know that the information is inside information (only that they ought

MAR, when it comes into effect, will also include

to have known), and the relevant behaviour need not

additional sub-categories of inside information in

itself be on a regulated market or a non-regulated

relation

market.

allowances and to information on a client’s pending

to

commodity

derivatives,

emissions

order in financial instruments.

MAR, when it comes into effect, will broaden the definition of insider dealing.

What is “market manipulation”? What is the definition of “inside information”?

The MAD prohibitions on market manipulation include

“Inside information” is defined by MAR as including:

the following behaviour: 

“information of a precise nature which has not been

effecting transactions or orders to trade which

made public, relating, directly or indirectly, to one

give or are likely to give a false or misleading

or more issuers or to one or more financial

impression of the supply of, demand for, or

instruments and, which, if it were made public,

price of financial instruments;

would be likely to have a significant effect on the



effecting transactions which secure the price of

prices of those financial instruments or on the price

financial instruments at an abnormal or

of related derivative financial instruments.”

artificial level;

It should be noted that the MAR determination of

(in each case, unless the relevant person

what constitutes “inside information” differs from the

demonstrates

determination of “inside information” under U.S.

that

there

were

legitimate

reasons for such behaviour and the behaviour

securities laws. The MAR analysis focuses only on the

conformed to accepted practice on the relevant

price sensitivity; whereas under the U.S. analysis, the

market);

potential effect on price is only one of a variety of factors that may be considered when determining

3







effecting transactions or orders to trade using

What other obligations are imposed by MAD?

fictitious devices or other forms of deception;

MAD emphasizes the need for prompt public disclosure

dissemination of information giving a false or

and, prior to disclosure, control of inside information.

misleading impression (including rumours) as

In particular, it requires the public disclosure by issuers

to

of inside information as soon as possible.

financial

instruments

where

the

(By

disseminator knew or should have known that

comparison, a public company in the United States is

the information was false or misleading;

generally only subject to an affirmative obligation to disclose material developments when required under

requiring or encouraging another to do any of

stock exchange rules, when a Form 10-K, 10-Q or 8-K

the above.

must be filed, or when conducting an offering.) MAR, when it comes into effect, will broaden the

An

issuer may delay public disclosure so as not to prejudice

definition of market manipulation.

its legitimate interests, but only if the delay does not mislead the public and the issuer is able to ensure the

Are there any specific exemptions from MAD?

confidentiality of that information. MAD expressly provides that the prohibitions contained

In this context,

where market rumours have begun to circulate, a failure

on insider dealing and market manipulation do not

to disclose information may mislead investors. Member

apply (a) to dealing in one’s own shares under a buy-

states may require issuers to inform the relevant

back programme or (b) to the stabilisation of a financial

competent authority without delay of any decision to

instrument where such stabilisation complies with the

delay public disclosure of inside information.

Buy-back and Stabilisation Regulation. Wherever an issuer, or a person acting on the issuer’s This Regulation specifies particular periods in which

behalf, discloses any inside information to any third

stabilisation action can take place, limitations on the

party

price at which securities can be offered as part of the

the

normal

exercise

of such

person’s

employment, profession or duties, he must also make a

stabilisation action, a maximum proportion (15%) that a

complete and effective public disclosure of that

greenshoe option may constitute of the original offer,

information.

and a maximum proportion (5%) that any other over-

This public disclosure must be made

simultaneously, in the case of an intentional disclosure,

allotment (not including a greenshoe option) may

or promptly, in the case of a non-intentional disclosure

constitute of the original offer.

(as is the case with respect to the timing of disclosures

Failure of stabilisation action to comply with the

under U.S. Regulation FD).

conditions set forth in this Regulation will not

However, public disclosure is not required if it would

automatically mean that the action will constitute market abuse.

in

breach a duty of confidentiality (whether based in law

However, full compliance with the

or in contract).

Regulation does provide a “safe harbour” defence to In addition, MAD requires that the issuer maintain a

any market abuse allegations.

list of “insiders” (i.e., those in possession of inside information). The insiders list must include:

4





the identity of any person having access to inside information;



issuers

regarding

the

manner

of

dissemination of regulated information; 

the reason why any such person is on the list; and



on

on

shareholders

to

notify

to

issuers

information regarding major holdings of listed shares.

the date at which the list of insiders was first created and last updated.

On 25 October 2011, following a lengthy consultation process, the EU Commission published a proposal for a

Issuers must promptly update the list of insiders and

directive to amend the TD, and on 12 June 2013, the

provide it to the competent authority upon request. The

European Parliament passed a legislative resolution

insider list must be updated on a regular basis and kept

adopting,

for five years after being prepared.

with

amendments,

the

Commission's

proposal. The proposed amendments include, inter alia, Are there any specific categories of information that are

an

required by MAD to be disclosed?

requirements (see below) to cover direct and indirect

MAD specifically requires that any senior executives or

holdings of financial instruments with ‘similar economic

persons discharging managerial responsibility must

effect’ to holding shares, a removal of the requirement

notify the relevant competent authority of dealings in

for listed issuers to publish interim financial statements

the company’s shares, or other securities or derivatives

and an increase in the powers of competent authorities

related to the shares, through a Regulatory Information

to implement sanctions for breaches of the TD.

Service (“RIS”) approved by the Financial Conduct

amended directive (the “TDAD”) entered into force on

Authority (“FCA”), which has replaced the FSA in this

26 November 2013 and member states were required to

function as the markets regulator as of 1 April 2013.

adopt necessary measures to transpose this directive

extension

of

the

major

holdings

disclosure

The

into national law within two years of this date. In the

Those responsible for reporting include directors and

United Kingdom, all provisions of the TDAD have been

others who have regular access to inside information

in effect as of 26 November 2015, enacted through

and the power to make decisions affecting the business

amendments to the Financial Services and Markets Act

or prospects of the company. They may or may not be

2000 and the FCA’s Disclosure and Transparency Rules

the same persons as those included on the insider list.

(“DTR”). What does the TD do?

The TD is a minimum harmonization directive, like

The TD applies to companies whose securities are listed

MAD, allowing individual member states (as “home

on an EEA regulated market and their shareholders. It

member states”) to adopt additional, and more onerous,

establishes obligations:

provisions in these respects than the TD itself.



on issuers to publish periodic financial reports

However, the TDAD has introduced amendments to

prepared in accordance with International

how often member states can require issuers to publish

Financial Reporting Standards;

periodic financial information and the rules regarding

5



the calculation of major holdings of shares and financial instruments triggering requirements for notifications.

a semi-annual financial report no later than three months after the first six months of its financial year.

Each issuer of securities listed on an EEA regulated market will have a “home member state” for TD

The annual and semi-annual financial reports must be

purposes. Member states other than the home member

prepared in accordance with international accounting

state (“host member states”) may not impose disclosure

standards and national law (where applicable).

requirements on an issuer which are more stringent What

than those of the issuer’s home member state.

are

the

available exemptions

from

these

requirements?

In respect of low denomination (below €1,000 or

The reporting requirements above do not apply to:

equivalent) debt securities (which do not include



convertible or exchangeable securities) and shares, the

a non-EEA issuer whose home jurisdiction

issuer’s home member state, where the issuer is

laws are considered “equivalent” to the TD in

incorporated in a third country, will be the member

this regard.

state chosen by the issuer from amongst the member

declared to have equivalent laws in this

states where its securities are admitted to trading on a

respect, including the United States, Canada

regulated market, or where the issuer is incorporated in

and Japan; and

the EU, the member state in which it has its registered office.



For debt securities which have a minimum

Certain countries have been

an issuer of (exclusively) high denomination (at least €100,000) debt securities.

denomination of at least €1,000 (or its equivalent), the home member state is selected by the issuer from

What are the content requirements for the required

among the member state in which the issuer has its

periodic financial reports?

registered office, where applicable, and those EU



member states in which the issuer has securities admitted to trading on a regulated market.

Annual financial reports must contain: 

Such

financial year;

choices, once made, remain valid for a three-year



period, unless the issuer no longer has any securities

a management report, containing a fair review of the development and

admitted to trading on a regulated market in the EU.

performance of the issuer's business

What are the obligations regarding financial reporting?

and describing the principal risks and

The TD requires that, unless an issuer falls within one of

uncertainties faced by it;

the relevant exemptions, it must publish: 

audited financial statements for the



a responsibility statement, which is a

an annual financial report no later than four

statement of assurance by the relevant

months after each financial year end; and

personnel of the issuer that the financial statements give a true and fair view of the issuer’s assets,

6

liabilities,

financial

position

and

issuers, the United Kingdom has imposed thresholds of

profits. 

3%, 4%, 5% and each 1% thereafter.

Semi-annual financial reports must contain: 

a

condensed

set

of

The obligation to notify the issuer of changes to major shareholdings extends to any additional securities

financial

which entitle the holder to acquire the company’s shares

statements;





an interim management report;



a responsibility statement.

with voting rights, such as options, warrants and convertible securities. The issuer thereafter has an obligation to publish such

Management reports must contain a fair

information promptly through an RIS.

review of the development and performance of the business and: 





Who is affected by these provisions?

an indication of important events

Subject to the exemptions noted below, the share

occurring in the annual or semi-

notification provisions are binding on any person,

annual period they cover;

irrespective of whether they are located inside or

their

impact

on

the

financial

outside the EEA, if they have an interest in a major

statements;

holding of shares listed on an EEA regulated market, or

a description of the principal risks

in a major holding of shares in a UK company listed on

and

a UK “prescribed market”, such as the AIM market of

uncertainties

for

the

next

the London Stock Exchange.

financial period; 

(for issuers of shares) details of major

What kinds of financial instruments on shares are

“related party” transactions.

covered?

What are the TD’s requirements as to notification of

Instruments such as physically-settled convertible or

major shareholdings?

exchangeable bonds are covered by these provisions, as are physically settled options, forwards and other

Where a person’s interest in shares, measured by

derivative instruments on such shares. Currently, as is

control of voting rights (by virtue of acquisition or

the case in the United States, cash-settled derivatives on

disposal of shares listed on an EEA regulated exchange

such shares are not covered – at least not unless they

and other financial instruments (including derivatives)

provide control over voting rights or any entitlement to

in respect of those shares), exceeds or falls below one of

acquire the underlying shares. However, the FCA in the

the specified thresholds, that person has an obligation to

United Kingdom has already extended these provisions

notify the issuer of the changes.

of the TD in the United Kingdom so that they also cover

Under the TD, these thresholds are 5%, 10%, 15%,

“pure” cash-settled derivative instruments referencing

20%, 25%, 30%, 50% and 75%. EEA member states can

shares listed on an EEA regulated exchange, such as

impose more stringent thresholds, and, in respect of UK

contracts for difference as they are known in the United

7

Kingdom (in addition to those which are settled

information within a few trading days of becoming (or

physically in shares), and the TDAD has enacted similar

being deemed to be) aware of the change.

extensions of the TD provisions in the rest of Europe.

Once again, EEA member states may exempt issuers from countries whose laws are deemed equivalent –

Are there any exemptions from these notification

again rendering the choice of TD home member state an

provisions?

important one for non–EEA issuers.

The notification requirements do not apply to: 



shares acquired for the sole purpose of clearing

What does MiFID do?

and settling within the usual short settlement

MiFID sets out high-level provisions governing the

cycle;

organizational and conduct of business requirements that

custodians holding shares who can only

instructions

given

in

to

financial

institutions

and

of regulated financial markets. It replaced the previous

writing/

Investment Services Directive in the EEA.

electronically; 

apply

harmonizing certain conditions governing the operation

exercise voting rights attached to such shares under

should

The Investment Services Directive enabled firms to

shares acquired/disposed of by a market maker

“passport” (i.e., carry on) financial services business

reaching/crossing the 5% threshold;

throughout the EEA, based on a single permission from 



voting rights in the trading book where the

the firm’s home state. The two main purposes of MiFID

rights do not exceed 5% and do not intervene

are to extend the range of services which can be

in the management of the issuer; and

included in this single “passporting” arrangement, and

voting

rights

attached

to

shares

also to prohibit host member states from imposing

for

additional local rules on that firm where it provides

stabilisation purposes.

cross border services from the home member state into What are the TD provisions regarding dissemination of

the host member state. However, host member states

information?

may still impose additional local rules where a firm

Where the financial reporting requirements or major

establishes a branch in such host jurisdiction.

shareholding disclosure obligations apply, the TD

MiFID is a maximum harmonization directive,

prescribes rules relating to the methods, conditions and

meaning that (with a few limited exceptions) a member-

timing of the issuer’s dissemination of such information

state may not impose additional or more onerous rules

to the public and the competent authority of the home

than MiFID prescribes.

member state.

The following pages contain FAQs and answers in

The most important principles outlined in the TD in

relation to MiFID in its current form.

However, on

this regard are timeliness of disclosure and equality of

20 October

information

legislative proposals consisting of a new Directive (often

–

shareholdings,

in

respect

the

issuer

of

changes

must

in

major

disseminate

the

2011,

the

EU

Commission

published

referred to as the MiFID II Directive) that repeals and

8

replaces the current MiFID Directive, as well as a new

What are the provisions regarding client classification?

Regulation (often referred to as MiFIR).

MiFID requires that firms must categorise their clients

These

amendments are intended inter alia to make financial

as follows:

markets more efficient and resilient, to update the



eligible counterparties;



professional counterparties; and



retail investors.

MiFID framework to take into account technological developments since it was enacted, to increase the transparency of equity and non-equity markets and to strengthen investor protection. The MiFID II Directive

A client’s classification determines the level of

and MiFIR came into force on 2 July 2014. By 3 July

protection it receives under MiFID, with retail investors

2016, EEA member states are required to have adopted

receiving the most protection and eligible investors the

and published measures adopting the MiFID II

least.

Directive into national law and these provisions must

investment

apply by 3 January 2017, although it is possible that this

Securities

and

Markets

Authority

firm’s

obligations

towards

eligible

counterparties, such that it will be required to act fairly,

deadline may be delayed by up to one year because the European

However, MiFID II is going to extend an

honestly and professionally and in a way that is fair,

has

clear and not misleading.

recognised that, in some areas, it is not feasible for firms There is some overlap between eligible counterparties

to put in place the necessary systems by such date.

and professional counterparties.

This is because the

Which firms are affected by MiFID?

eligible counterparty regime is only relevant to certain

MiFID affects all investment banks and financial

services including receiving and transmitting orders

institutions with a presence in Europe.

and executing orders on behalf of clients. Firms can therefore be treated as an eligible counterparty for some

What are the main provisions introduced by MiFID?

purposes and professional counterparties for others. It

MiFID has introduced provisions concerning:

is possible for clients to opt up or down categories, subject to certain safeguards. In particular, a client that



client classification;



suitability of advice/services;



appropriateness of services/products;

undertakes a qualitative and quantitative assessment of



best execution;

the client's expertise, knowledge and experience.



transaction reporting;

What are the provisions regarding suitability?



conflicts of interest; and

A suitability obligation is owed wherever a firm



pre-trade transparency.

would otherwise be treated as a retail client may only be reclassified as a professional client if the firm

provides investment advice or portfolio management services to a client. The firm must obtain sufficient information in relation to the client’s:

9



knowledge and experience;



financial situation; and



investment objectives.

narrowed, such that fewer instruments will benefit from the exemption (including, for example, units in structured UCITS funds).

entitled to assume that a professional client has the

This suitability obligation is owed to professional

necessary knowledge and experience for those products

clients, except that firms can assume that: 

professional

clients

In addition, the firm is

have

or services for which the client has been classified as a

the

professional client.

necessary

knowledge and experience relevant to the type What are the provisions regarding best execution?

of investment or service (though, for some

MiFID requires firms to take all reasonable steps to

entities that are currently professional clients,

obtain, when executing orders, the best possible result

such as municipalities, MiFID II when it comes

for their clients, taking into account price, costs, speed

into force will not allow such an assumption to

and likelihood of execution and settlement, size, nature

be made); and

or other relevant considerations. 

professional clients (other than “opted up”

firm’s best execution policy will have to be provided to

retail clients) can financially bear the risk of

clients in detail and in clear language that is easy to

loss of the investments.

understand. This duty is modified in relation to discretionary

What are the provisions regarding appropriateness? Whenever a

firm provides

Under MiFID II, a

services

(other

portfolio managers and to receivers and transmitters of

than

orders, as they do not execute orders. It is not possible

investment advice or portfolio management services) to

to contract out of the duty of best execution, but the

a professional or retail client (but not an eligible

duty does not apply when dealing with eligible

counterparty), it owes an obligation to determine the

counterparties.

appropriateness of the services for the client. In this regard, the firm must ask the client to provide

What

information about his or her knowledge and experience

are

the

provisions

regarding

transaction

reporting?

in the relevant investment field, in order to determine Transactions in any financial instrument admitted to

whether the client has the necessary experience and

trading on an EEA regulated market must be reported

knowledge to understand the risks involved in relation

to the relevant competent authority, i.e., the home

to the product or service.

member state competent authority for the firm (or the The appropriateness test is not applied to certain

branch of the firm) carrying out the transaction.

“non-complex” instruments (e.g., shares admitted to The requirements apply even if the transactions are

trading on a regulated market or units in UCITS) where

not carried out on a regulated market.

those instruments are sold on an “execution-only” basis,

In addition to equity and debt transactions, the

provided certain conditions are met. Under MiFID II,

reporting

the categories of non-complex products have been

10

obligation

includes

transactions

in

commodity, interest rate and currency derivative

A “systematic internaliser” is a firm that, on a frequent

transactions admitted to trading on EEA regulated

and systematic basis, deals on its own account by

markets.

executing client orders in liquid shares outside of a regulated market or MTF.

The reporting can be made:

The pre-trade transparency obligations only apply to



directly by the firm;



by a third party on the firm’s behalf;

firms which deal below a standard market size (which will vary depending on the liquidity of the shares in



by a trade-matching or reporting system

question).

approved by the competent authority; or 

MiFIR will expand the existing “equity” transparency

via a regulated market or multilateral trading

regime (which principally covers shares) to cover

facility (“MTF”) through whose systems the

“equity-like” instruments (e.g., depositary receipts, ETFs

transaction was completed.

and certificates) and debt instruments (e.g., bonds, structured products and derivatives).

What are the provisions regarding conflicts of interest? MiFID provides that firms must “maintain and operate effective

organizational

and

_____________________

administrative By Jeremy C. Jennings-Mares, Partner,

arrangements with a view to taking all the reasonable

and Peter J. Green, Partner,

steps designed to prevent conflicts of interest from adversely affecting the interests of clients.”

Morrison & Foerster LLP

More

specifically, firms must adopt a conflicts of interest © Morrison & Foerster LLP, 2016

policy which describes the arrangements that they have established to manage conflicts and, where necessary, disclose the policy to their clients.

Firms are

particularly encouraged to pay attention to proprietary trading as a potential conflict. What

are

the

provisions

regarding

pre-trade

transparency? MiFID states that a firm which qualifies as a “systematic internaliser” is not permitted to buy and sell shares using the existing “invitation to treat” business model, but will, instead, be required to act as a market maker. It must, therefore, hold out firm offers to buy and sell at specified prices, rather than invite clients to negotiate a deal.

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