The EU Market Abuse Regulation What does it mean for listed companies?

Lucy Reeve, James Wootton, Rasmus Berglund

January 2016

We need to get ready for MAR A new EU-wide regime for market abuse, disclosure of inside information, insider lists and PDMR dealings. Takes effect in all Member States from 3 July 2016.

Replaces the Market Abuse Directive (which was implemented in the UK in FSMA 2000, DTR 2 and DTR 3). AIM companies subject to new regime as well as Main Market companies. FCA will enforce in the UK and has consulted on changes to its handbook. 1

What does the new EU framework look like?

Level 1

MAR

Level 2

Commission Delegated Acts

Implementing Technical Standards

Level 3

Regulatory Technical Standards

ESMA Guidelines

Supplemented by UK guidance

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The key areas of MAR for corporates

Disclosure of inside information

Insider Lists

PDMR dealings

Market abuse offences

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Ask the audience Have you started preparing your organisation for MAR?

1: Not at all

2: We have been following developments but otherwise have not done much so far 3: We have identified which procedures need updating, arranged training dates, put this on the board agenda and allocated staff and budget to what needs to be done 4

Ask the audience How much time do you think you need to dedicate to preparing for MAR between now and July?

1: 0-25 hours 2: 25-50 hours 3: 50-100 hours 4: more than 100 hours 5

Inside information

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What is inside information?

Article 7 MAR

Of a precise nature

Has not been made public

Relating directly or indirectly to one or more issuers or financial instruments

Would be likely to have a significant effect on price of those financial instruments or related derivatives if it were made public

No change 7

What is precise? (Art. 7(2)) Indicates circumstances that exist or may reasonably be expected to come into existence or an event that has occurred or may reasonably be expected to occur Specific enough to enable a conclusion to be drawn as to possible effect of those circumstances or that event on the prices of the financial instruments or related No derivatives

change 8

Intermediate steps (Art. 7(2)-(3)) In the case of a protracted process that is intended to bring about, or that results in, particular circumstances or a particular event, those future circumstances or that future event, and also the intermediate steps of that process which are connected with bringing about or resulting in those future circumstances or that future event, may be deemed to be precise information An intermediate step in a protracted process shall be deemed to be inside information if, by itself, it satisfies the criteria of inside information Codifies existing position 9

How precise is precise?

Does not have to be wholly accurate

A transaction does not have to be certain

A realistic prospect it will happen – does not need to be more than 50/50

Needs to indicate direction of price movement but not extent

Recap of recent cases 10

Likely to have a significant effect on price Information which, if it were made public, would be likely to have a significant effect on price shall mean information a reasonable investor would be likely to use as part of the basis of his or her investment decisions Article 7(4) MAR Settles debate 11

Tips for determining inside information Consider the four limbs of the definition separately Consider overall context of information Remember that the FCA/market will judge with the benefit of hindsight In light of recent FCA approach, err on the side of caution 12

Ask the audience: is this inside information? An issuer is considering making a major acquisition in the distribution sector to take advantage of certain possible synergies. Two possible targets have been identified (both private companies) and an initial approach made. Is this inside information? 1. Yes 2. No 13

Ask the audience: is this inside information? A utilities provider has identified a hacking attempt. No customer data has been accessed or stolen. The IT department are pleased that this shows the robustness of their security.

Is this inside information? 1.

Yes

2.

No

Would your conclusion be different if customer bank details had been accessed? 14

Disclosure of inside information to the market

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Obligation to announce inside information (Art. 17(1))

An issuer shall inform the public as soon as possible of inside information which directly concerns that issuer

Subject to limited ability to delay disclosure

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How to announce inside information Must not combine the disclosure of inside information with marketing of activities Must announce in a manner which enables fast access and complete, correct and timely assessment of the information by the public - website/social media posts insufficient Any inside information disclosed must be posted and maintained on issuer’s website for at least five years Minimum requirements for website in Technical Standards, including free access, inside information easy to find and date and time of disclosure 17

When disclosure can be delayed Art. 17(4): An issuer may delay disclosure of inside information if these conditions are met: • Disclosure is likely to prejudice its legitimate interests (ESMA guidelines) • Delaying disclosure is not likely to mislead the public (ESMA guidelines) • The issuer can ensure the confidentiality of the information

Art. 17(7): If confidentiality is compromised, must disclose as soon as possible. This includes where there is a rumour “sufficiently accurate to indicate that the confidentiality of the information is no longer ensured.” Art. 17(8): If selective disclosure is made to a third party who isn’t subject to confidentiality duties, the issuer must announce (simultaneously if intentional and promptly if not). 18

NEW requirement to notify the FCA of delay (Art. 17(4)) If disclosure is delayed, the issuer must notify the FCA after announcement.

Obligation to provide an explanation of how the conditions for delay were satisfied.

Must include names of persons who made decision to delay disclosure

Will include details of measures put in place to preserve confidentiality

Must include time and date decision was taken

FCA proposes making this on request only 19

Delay to preserve the stability of the financial system (Art. 17(5)) An issuer that is a credit institution or financial institution may delay public disclosure of inside information (including information about temporary liquidity problems) if Disclosure entails a risk of undermining the financial stability of the issuer and of the financial system. It is in the public interest to delay. The confidentiality of the information can be ensured. The FCA has consented in advance (having consulted with the Bank of England or other supervisory authority). 20

Ask the audience Do your current procedures capture exactly when a decision to delay disclosure is taken?

1: Yes 2: Date but not time 3: No 4: Don’t know 21

Ask the audience Do your current procedures capture who makes the decision to delay disclosure and how the conditions are met?

1: Yes

2: No 3: Don’t know 22

Actions Review and update current procedures for identifying inside information. Implement revised protocol for decisions to delay disclosure, to include detailed record-keeping. Review website requirements against Technical Standards and arrange for announcements to remain up for 5 years. 23

Insider Lists

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Insider Lists (Art. 18) Issuers and persons acting on their behalf must maintain records of all persons working for them in any capacity with access to inside information. The insider list must be promptly updated after someone gains or ceases to have access or there is a change in the reason someone has access. Updates to include date and time trigger event occurred.

For each insider the list must state identity, reason for being on the list, date and time they got access to inside information and date the list was drawn up. If the FCA requests a copy of the insider list it has to be provided as soon as possible

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Insider lists: what’s new under MAR? Any person on the insider list to acknowledge in writing the legal and regulatory duties entailed and sanctions. Format harmonised across the EU and set out in TS.

A lot more data will need to be recorded on each insider. One list with separate sections for different pieces of information and optional permanent insider section. 26

What will the insider list look like?

27

Ask the audience How often do you currently remind insiders of their duties as such?

1: Once, when they join the company 2: At regular intervals (e.g. every year/two years) 3: Every time they are added to an insider list 4: I’m not sure if we do at all 29

Actions Update standard inside information memo for new insiders and new joiners. Consider what systems you need for all insiders to acknowledge their duties in writing.

Consider how you will get all the data you need for the insider lists and processes needed to keep and protect it. 30

PDMRs

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PDMR dealings (Art. 19 MAR)

Notification of dealings

Restrictions on dealings

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Notification of transactions The notification of transactions conducted by persons discharging managerial responsibilities on their own account, or by a person closely associated with them, is not only valuable information for market participants, but also constitutes an additional means for competent authorities to supervise markets (MAR Recital 59). Persons discharging managerial responsibilities, as well as persons closely associated with them, shall notify the issuer … and the competent authority … of every transaction conducted on their own account relating to the shares or debt instruments of that issuer or to derivatives or other financial instruments linked thereto (MAR Art. 19(1)). 33

Who is caught? PDMRs

• No change in effect • Director • Senior manager • Regular access to inside information • Power to take managerial decisions Closely associated persons (CAPs)

• Broadly the same • Family members • Legal person, trust or partnerships NEW obligation to keep a list

• Issuers must draw up a list of all PDMRs and closely associated persons

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Transactions triggering duty to notify Nonexhaustive lists in MAR and Delegated Acts

Pledging or lending

Transactions on behalf of a PDMR/CAP (even if third party has full discretion) Exception for “linked instruments” e.g. units in a fund or product, if the composition is less than 20% exposed to the issuer or the PDMR/CAP can’t know the composition Transactions under life insurance policy (PDMR/CAP must have discretion) No active role needed – gifts, inheritance etc covered

Receipt and exercise of options covered 35

Notifications – what’s new? Disclosure made by PDMR/CAP to Issuer and UKLA

PDMR/CAP notification and issuer announcement within 3 business days of dealing (rather than 4+1)

€5,000 threshold per calendar year

Debt instruments caught as well as shares and related instruments – exemption for linked instruments with 20% or less exposure 36

Template for notifications Technical Standards set out template for PDMR/CAP and issuer notifications (and amendments). Issuer to make public entire notification received from PDMR/CAP.

FCA will advise on electronic means to be used. Possible to aggregate multiple dealings by same PDMR as long as conditions met but not similar dealings by different PDMRs. 37

NEW procedural requirements

Issuers to notify PDMRs of their notification obligations in writing

PDMRs to notify closely associated persons and keep copies of notifications 38

Ask the audience Your PDMRs are likely to expect the co sec/compliance teams to take care of their new obligations to notify the UKLA of their own account transactions and notify their closely associated persons in writing of their obligations. 1. True 2. False

39

Ask the audience How do you think you will deal with the new threshold for notifications?

1: We will notify everything, even if below the threshold. 2: We will require PDMRs to notify us of all dealings, but we will only notify the market above the threshold. 3: Our PDMR’s dealings are always greater than €5000 so it isn’t an issue for us. 4: We will only require PDMRs and CAPs to notify above the threshold and we will only notify the market above the threshold. 40

Actions Prepare list of PDMRs and closely associated persons and process for keeping it up to date. Consider how to ensure PDMRs and CAPs notify the UKLA as well as the issuer. Consider whether to impose tighter deadline internally to ensure issuer has time to announce. 41

Actions Consider how you will apply the €5000 threshold in practice. Prepare memos on notification obligations to send to PDMRs and for PDMRs to send to closely associated persons.

Consider how best to record the notification sent to closely associated persons. 42

PDMR dealing restrictions

43

PDMR dealing restrictions – before and after

Now

From July

• Model Code requires PDMRs to obtain clearance before dealing at any time • Model Code prohibits PDMR dealings in a close or prohibited period • Obligation on PDMRs to prevent dealings by connected persons during a close period • Model Code sets out specific exceptions for dealings in close and prohibited periods

• MAR prohibits PDMR transactions on own/third party account during a closed period • MAR sets out (fewer) specific exceptions • MAR does not provide a dealing clearance system • FCA propose to make premium listed companies have “effective systems and controls” regarding dealing clearance procedures

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PDMR dealing restrictions – the closed period Art. 19(11): A PDMR shall not conduct any transactions on its own account, or for the account of a third party, directly or indirectly, relating to shares, debt instruments, derivatives or other financial instruments of the issuer during a closed period of 30 calendar days before announcement of an interim or year-end financial report

“PDMRs” “transactions on own/third party account” “directly or indirectly”

“interim financial report or year-end report’”

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PDMR dealing restrictions – timing

When do the restrictions apply?

31 December

Old

New Year End

Close period (Model Code)

Inside information period too!

15 April

15 February

Usually 6 weeks from Year End 30 days

Inside information

Preliminary results

Closed period (MAR)

Publication of Annual Report 46

PDMR dealing restrictions – the permissions So what can PDMRs do? Sell shares • in exceptional circumstances only (severe financial difficulties) • only way to obtain funds immediately

Acquire shares • in relation to share qualification scheme requirements • final date under company’s articles falls during close period

ISSUER PERMISSION REQUIRED Transfer shares • between two accounts of the PDMR • no change in beneficial entitlement • transfer does not result in a change in price

Employee schemes • grant of options and awards • purchase of shares under an employee savings scheme • exercise of options due to expire (NEW)

General prohibition on insider dealing applies

47

Ask the audience How would you want to monitor PDMR dealings once the Model Code goes?

1: We would prefer the FCA to issue guidance on a company dealing clearance process 2: We would prefer to design our own company dealing clearance process

3: We do not want to have any dealing clearance process 48

Actions Consider new dealing clearance system Revise company share dealing code Communicate changes to PDMRs Consider application of exemptions Review award and vesting timetable 49

Market abuse offences

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What is insider dealing? It is unlawful for an insider to engage or attempt to engage in insider dealing or to recommend or induce another person to engage in insider dealing (Art. 14 MAR)

Insider dealing is where an insider is in possession of inside information and uses that information by acquiring or disposing of, directly or indirectly, financial instruments to which that information relates, whether or not the dealing is for its own account or the account of a third party (Art. 8 MAR) Where someone has placed an order relating to the financial instruments in question before they have access to the inside information, it will also be insider dealing to cancel or amend that order (Recital 25 and Art. 8 MAR) Where a person possesses inside information and then deals or attempts to deal, it is presumed that they have used that information. This can be rebutted and does not apply to “legitimate behaviours” (Recital 24 and Art. 8 MAR) 51

What is unlawful disclosure? (Art. 10) Where an insider possesses inside information and discloses that information to any other person, except where the disclosure is made in the normal exercise of an employment, a profession or duties. The onward disclosure of recommendations or inducements to deal is unlawful disclosure … where the person disclosing knows or ought to know that it was based on inside information. Market soundings will be within the normal exercise of employment, profession or duties if carried out in accordance with strict procedures. 52

Requirements for market soundings (Art. 11 and Technical Standards) Internal arrangements

Procedures prior to conducting the sounding

Procedures for conducting a sounding

Record Keeping

ESMA guidance for recipients

Establishing internal procedures for carrying out market soundings, limit number of employees who carry out soundings and ensure they are adequately trained

Specifically consider if the sounding will involve the disclosure of inside information

Get recipient’s consent to receiving inside information, inform them they cannot use it and must keep it confidential

Detailed records of each step to be kept for five years

Recipient must itself decide if it has inside information

53

Market manipulation

Behaviours broadly similar to current rules, but attempts and benchmarks also covered entering into transactions likely to give false/misleading signals, or secure the price of instruments

transactions likely to affect price which employ fictitious device or any form of deception or contrivance

dissemination of false/misleading information where knew/ought to have known was false/misleading

transmitting false or misleading information in relation to benchmarks 54

Reasonable measures defence for corporates Where legal persons have taken all reasonable measures to prevent market abuse from occurring but nevertheless natural persons within their employment commit market abuse on behalf of the legal person, this should not be deemed to constitute market abuse by the legal person. Recital 30 MAR

55

Buy-backs safe harbour Safe harbour so that buy-backs are automatically not market abuse if certain conditions met. Parameters/conditions are broadly the same (announcements, price, volume).

Safe harbour will be in MAR, details in technical standards. FCA proposals to remove LR prohibition on buy-backs in prohibited periods. 56

Actions Check what manuals, memos or training refer to the existing market abuse offences and update them to reflect the language and sources of the new offences. Implement new procedures for investor discussions about proposed transactions to fall within market soundings safe harbour.

Check buy-backs authority in next AGM notice isn’t tied to old safe harbour. 57

So what now?

58

The regime from July in a nutshell… Similar rules on disclosure of inside information and conditions for delay

New FCA guidance on PDMR dealings. Need to update internal dealing codes

Issuers need to keep careful records of decisions to delay disclosure and notify the FCA after the event

More data on insider lists and need to accept duties

Similar rules on disclosure of PDMR dealings but remember shorter timeframe

Market abuse offences similar but new safe harbour for market soundings 59

Time to get procedures up to scratch

All reasonable measures defence for corporates

New procedural obligations

FCA focus on systems failings

Need for robust compliance procedures

60

Who else needs to know about this?

Need to run internal training on new inside information policy.

Need to educate PDMRs on new rules and obligations. 61

Ask the audience How much time do you think you need to dedicate to preparing your organisation for MAR between now and July?

1: 0-25 hours 2: 25-50 hours 3: 50-100 hours 4: more than 100 hours 62

Ask the audience How much board time do you think the new requirements in MAR will take up from July?

1: A great deal

2: Quite a lot 3: Not much 63

Linklaters can help you prepare

Bespoke training for your Board and internal teams

New share dealing codes and standard memos

One stop shop on the client knowledge portal with practical guides 64

Any questions? Or comments, or observations? >Remember to sign the CPD register >Your feedback is appreciated – please leave on your chair, or at the desk outside. The recording of this session will be available within a couple of days on our Knowledge Portal It also gives you: >

a searchable database

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personalised email alerts

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online training to access anytime

You’ll find it at https://knowledgeportal.linklaters.com Market abuse microsite 65

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