The European Market Abuse Regulations (MAR) have been in effect since July of 2016. Recent priorities published by regulators in the UK and across Europe demonstrate that MAR is hardly old news, remaining a consistent priority since its inception. And regulatory enforcement shows that even six years in, firms are still struggling to stay compliant with MAR regulations and the flow of material nonpublic information (MNPI) across their organizations.
Issuers and any person acting on their behalf or on their account, shall take all reasonable steps to ensure that any person on the insider list acknowledges in writing the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information.
—Article 18 of the Market Abuse Regulation
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
Material non-public information arises in the course of deals and other financial services activities. Access to MNPI becomes an issue when an individual takes information that's not available to the public and uses it to gain an unfair advantage over other investors. The ability to capture this type of information, confirm its nature and track who has access to it is critical from a regulatory perspective to reduce the risk of market abuse and market manipulation.
To keep up with stringent market abuse requirements, firms must have clear processes and controls and be able to track and update lists of individuals that have access to insider information. Technology provides a best practices framework to support policies and procedures, facilitates completion of required activities, attestations and disclosures, and flags gaps and suspicious activity for proactive resolution. Read more in our white paper written in conjunction with Katharine Leaman from Leaman Crellin Ltd.
Market Abuse in Market Soundings
On 31 October 2023 the FCA published Market Watch 75, a newsletter on market conduct and transaction reporting issues noted by the agency. The newsletter highlights recent concerns about market soundings that the agency has observed when reviewing activities surrounding market abuse.
Market soundings are interactions between issuers and investors that help determine interest in a transaction before its announcement by allowing issuers to gauge investor opinions to help set price, size and structure.
The agency has noted recipients of market soundings (MSRs) engaging in trading activity after being approached to receive information from disclosing market participants (DMPs). Even though specific details of the security involved were not provided by the DMP, the MSR was able to identify the security in question—and then trade in it. This indicates to the FCA that the MSR may have had other insider information that enabled them to figure out the security involved.
The newsletter reminds firms that “robust market soundings procedures are important for protecting market integrity because they manage the risks of investors inappropriately using inside information from these soundings.”
To minimize the risk of market abuse stemming from market surroundings, the Market Watch recommends that firms take steps including appointing compliance gatekeepers to take initial calls from DMPs. DMPs are also reminded to use discretion to reduce the risk of inadvertent disclosure, especially when dealing with individuals outside the financial services industry who might have less of an understanding of market abuse rules. Finally, both sides are advised to minimize the time that passes between the initial approach and consent to receiving the market sounding.
Market Abuse as a Driver of Harm
On 28 September 2023 the FCA issued a Dear CEO Letter outlining supervision priorities and warning executives of corporate finance firms (CFFs) of issues including failure to put controls into place to prevent and address market abuse and conflicts of interest. The letter also reminds firms that they must keep up to date with regulatory change.
According to the letter, "the risks of market abuse are heightened in CFFs that act for listed corporate issuers and therefore routinely have inside information, and also trade in listed securities for the firm and for their clients.”
Examples of poor systems and controls around market abuse cited in the letter include ineffective barriers to information, inadequate processes for identifying insider information and incomplete and inaccurate insider lists.
The letter mandates that CFFs adhere to the rules and requirements set forth in SYSC 10 and Principle 8 to properly identify, record and manage conflicts of interest that arise from standard business along with new clients and new transactions. Firms are also expected to have robust systems and controls to fullfill their obligations under MAR, and also ensure controls are tailored to their individual business needs.
The letter goes on to remind compliance functions that they should be actively monitoring and challenging activities and to escalate issues uncovered concerning market abuse, conflicts of interest and personal account dealing to senior management. The agency will continue to conduct reviews in these areas and will consider the need for criminal, civil or supervisory sanctions as deterrents.
MNPI and MAR in the Regulatory Spotlight
- In January 2023 the French Autorité des Marchés Financiers Enforcement Committee imposed financial penalties of between €5,000 and €1,000,000 on ten individuals for insider dealing. It also imposed a fine of €350,000 on the firm involved for failing to comply with its obligations to maintain and update the insider list.
- ESMA's Strategic Priorities 2023-2028 emphasizes the importance of market integrity and investor protection. It aims to strengthen supervisory convergence among member states, enhance market surveillance, and promote unified enforcement of MAR in support of orderly markets.
- In the UK, the FCA's Business Plan 2023/24 promises to deliver assertive action on market abuse. Financial firms and issuers are expected to have robust systems and controls, timely and accurate disclosures, high-quality reporting practices and a strong anti-market abuse culture. Firms and individuals that don't comply can expect criminal, civil and supervisory sanctions.
- The Netherlands Authority for the Financial Markets Annual Report 2022 highlighted their tightened levels of supervision and increased enforcement around market abuse and the timely announcement of insider information.
Reduce the Burden of MAR and Manage MNPI with MCO
Especially when several departments and multiple employees come into contact with privileged information, developing insider lists and ensuring they are up to date can be a moving target as deals move through the pipeline or releases are prepared. MCO's insider list and MNPI management compliance solution enables firms to easily track who is privy to insider information and how long individuals and access should be tracked and provides control of roles and rights assignments. Compliance teams can deliver insider lists to regulators at a moment’s notice, with a robust audit trail tracking when lists were created and who had access to specific pieces of information.
Set up a demo to see how we help firms reduce the risk of market abuse by effectively and efficiently managing MNPI and Insider List Management across the firm.
