The European Market Abuse Regulations (MAR) have been with us for a few years now. Their purpose was to make companies more transparent and fight the problem of insider trading. But despite being introduced in 2016, the evidence suggests that most UK businesses are not yet compliant with the law and firms are struggling to handle material nonpublic information (MNPI).
The British Legal Forum recently surveyed more than 400 firms to get a sense of how many of them had robust strategies in place to comply with the insider list management stipulations. The findings showed that only seventeen per cent were fully compliant and that six per cent didn’t have any kind of list management strategy in place at all.
For many firms, the EU regulations are worrying. The new law gives the European authorities the right to impose hefty fines on companies that do not comply. Added to this, the rules are not entirely clear or easy to implement.
While some businesses are not currently complying with regulations because they’re not aware of them or because they deem them to be unimportant, many are struggling on a purely practical level. The rules are uncomfortably vague and seem to contain demands which are difficult to fulfil. It could be why we often see on the news insider trading scandals. If a company receive material nonpublic information is prohibited from discussing or acting on that information.
Investment bankers or other staff members should never benefit themselves from MNPI or make the information public to benefit others. In addition, investment bankers must use code names when dealing with unannounced transactions to protect organizations. Examples of material non-public information include:
- Company intention to launch a take-over bid, auction, public offering, private placement, stock repurchase, consolidation, or split
- Resignation of senior executives
- Purchase or sale of an important asset or business
- Earnings release that is inconsistent with expectations
- Any significant legal or regulatory proceeding or settlement
The goal of MAR is to force companies to make all information, such as the above, that could affect their share price publicly available as soon as people inside the company find out about it. Material non-public information arises in the course of many banking deals and other day to day banking activities. The ability to capture this type of information, confirm its nature and track who has access to it is critical from a regulatory perspective.
Management and employees must ask themselves whether an investor investing in the company’s stocks and shares would take information that they know into account when deciding on whether to buy or sell a security.
MAR says that any information that could affect the investment choices of a “reasonable investor” should be made public as soon as possible. Representatives of companies, therefore, must ensure that they distribute any pertinent information to the market about the internal operations of the company fast or they could be falling foul of the law.
The second issue is more conceptual than operational. Delivering information to the market is time-consuming but knowing what information you should distribute is even more challenging. Let’s say, for instance, that you’re an executive and you have an idea to buy out a particular firm. You know that if you share your plan with the public, the share price will soar, and your company will become more valuable. The MAR states that you should report any information that might have a “significant impact” on the share price of your firm so, strictly speaking, under the rules, you should immediately divulge your idea.
Of course, this is where the logic of the regulations breaks down. The mere divulgence of pertinent information, such a buying out a company, would cause prices to adjust upwards anyway in anticipation of higher future income, whether it happens. Problems like this make it hard to know what you should say to the investing public, and what you shouldn't. The ambiguities in the law make the practical matter of protecting yourself against it more troublesome.
The best policy is always to act as fast as possible and create lists immediately, as soon as you become aware that you have insiders in your firm who have more information than the market. By constructing the list, you prove your intention to protect against insider trading and show that you take it seriously. You can show that you’ve acted within the spirit of the law and done what you can to prevent people in your organization gaining an unfair advantage over other investors.
When to Create an Insider List
Current legal precedent suggests that companies should create insider lists the moment that insider information that could affect the share price is revealed.
Take the case of the Swedish bank SEB. The CEO of the bank resigned her position on January 13th, 2017 - the same day that her decision went public. However, a month before, on December 13th, 2016, there was a board meeting where she first discussed her resignation decision. People in the company, therefore, knew that she would resign a month before the public.
MAR rules meant that the senior management needed to create a list of insiders, which they did on December 15th. But regulators took the issue with the timing, saying that there was no justifiable reason for the 48-hour delay and that executives should have drawn up a list immediately. The Swedish regulator then proceeded to fine SEB more than €300,000.
What does this mean for firms? Strictly, they must get the timing of their lists right. It’s not enough to comply with the regulations as an afterthought and create an insider list when it’s convenient. An insider list needs to be done immediately.
SEB executives went wrong when they prioritized their other business needs and put the EU regulations on the backburner. What they needed to do instead was incorporate insider list compliance into every interaction, ensuring that there was a mechanism in place to make it happen. It’s fundamentally a governance issue.
When to Provide Information to the Public Under MAR
Companies generally cannot sit on insider information either. On October 26th, 2016, the CEO of the Swedish technology group Hexagon was arrested on suspicion of insider trading in another company. The Hexagon’s board, however, didn’t want to talk about the arrest until they could be sure that the news of the arrest was public. The company waited until October 31st before informing shareholders. The prosecutor, however, said that the information became public on the 29th - the date of the court decision to detain the CEO - and issued a €600,000 fine.
Companies, therefore, need to reduce their conduct risk by releasing information to shareholders immediately. While there may be exceptional circumstances under which they do not have to issue information, these are rare. As with insider lists, the best policy is to release information as soon as possible to the public, for example through:
- the publication of a prospectus
- a press release
- disclosure of the information in a national or broadly disseminated TV, radio or print news service
- the issuance of a proxy statement
Reduce the Burden of MAR and Manage MNPI with MCO
MCO saw that the new MAR regulations placed a high burden on companies. MCO, therefore, has created insider list and MNPI management compliance product that enables you to actively track who is privy to insider information, how long you need to track them and control roles/rights assignments.
With quality list management in place, you’re able to deliver insider lists to regulators at a moment’s notice, showing when you created lists and who had access to specific pieces of information. By creating a robust audit trail, you protect yourself against the regulators and remain sustainably compliant long-term.
Would you like to know more about the lack of safeguarding material non-public information and how to prevent insider trading. Watch our webinar with Thomson Reuters' expert, Todd Ehret. On-demand Webinar - Watch it now!