Overview of Market Abuse Regulations
In the UK, the FCA introduced the Market Abuse Regulation (MAR) in 2016 to make companies and employees trading activities more transparent and fight insider trading as well as increase market integrity and investor protection.
The regulation contains prohibitions of insider dealing, unlawful disclosure of inside information and market manipulation. The territorial scope of MAR covers trading in relevant securities and derivatives in non-EU countries where the relevant investments are traded on an EU Regulated Market.
MAR applies not only to financial industry or broker-dealers, investment advisers, and other registrants, but it extends to any individual in receipt of inside information who trades while in possession of that information, which means that a person who doesn’t work in a financial institution can also be found guilty of market abuse.
The regulation states that investment bankers or other staff should never benefit themselves from material non-public information (MNPI) or make the information public to benefit others. MAR requires companies to improve their controls to protect the market from insider dealing, unlawful disclosure of inside information and market manipulation. Besides, companies must take full responsibility on employees training on the law, controls, surveillance, and supervision to avoid market abuse.
Regulations to prevent insider trading are present across the globe and are very similar in their respective aim, to prevent insiders from wielding unfair market advantage. In the United States, Section 204A of the Investment Advisers Act of 1940 requires firms to have policies and procedures to prevent the misuse of MNPI and avoid insider trading. Also in the US, the SEC Rule 10b5 makes illegal to use any measure to defraud, mislead the market, or conduct business operations that would deceive another person in the process of conducting transactions involving stock and other securities.
The regulation of market manipulation in Australia prohibits any market abuse practice and set criminal penalties to any person who violates the law as set out in the Financial Services Reform Act. While in Singapore, the Securities and Futures Act of Singapore (SFA) governs the market misconduct regime and the Monetary Authority of Singapore (MAS) recently confirmed that market misconduct constitutes one of its key areas of focus for enforcement and investigations into cases of market abuse.
Are individuals aware of what constitutes a Market Abuse offence?
- Insider trading is the act of illegally using inside information to deal or attempt to trade in financial instruments or to recommend or induce another person to transact based on inside information.
- Unlawful disclosure of inside information is the act of disclosing material non-public information or MNPI without following the right procedure for dissemination of such information. MAR currently mandates companies to use insider lists to manage and keep track of who accesses the information and when the events happened.
- The improper use of inside information happens when someone uses insider information for their advantage. Firms should consider a robust training protocol for those who have access to inside information so that they understand their obligations.
- Manipulating transaction or devices occurs when an individual or company undertakes certain transactional behaviours that affect the price and market value of assets in a misleading way, with the help or not of fictitious instruments.
- Dissemination of false information refers to the act of distributing information knowing that the material is false or misleading.
- Misleading behaviour and market distortion are the act of misleading or give the market a false impression in any way.
Current enforcement on Market Abuse Rules
With uncertain and volatile stock markets, regulators are heavily pressuring companies, especially financial institutions, to comply with the law. The number of global trading increased in the past months, and companies saw themselves struggling to keep records, manage insider lists and detect conflicts of interest. The current situation resulted in more opportunities for insider trading and market abuse.
Subsequently, cases where companies failed with the scope of the Market Abuse Regulation recently made the news:
- FCA seeks to fine and ban CEO for market abuse
- International bank under investigation for violating market abuse regulations
- US bank pays more than $920 million to resolve US authorities’ claims of market manipulation
- MNPI Remains a High Risk Area for Compliance
Furthermore, ESMA released a map that contains all administrative and criminal sanctions imposed under Articles 14 and 15 of MAR EU to date. The ESMA Market Abuse Regulation map shows that Regulators imposed 61 criminal sanctions to companies or individuals in the Netherlands, 35 in Germany, 11 in Sweden, 2 in Spain, among others. These companies were subject to fines, administrative sanctions, and reputation damage.
The US and European authorities are alerting companies the importance to have robust system and controls, be aware of insider trading and other misconduct that can harm the market and investors.
Individuals may think that regulators are more lenient because of the current market volatility. However, the number of enforcement actions against firms and individuals deliberately engaged in market abuse has heightened. Companies and individuals that are involved in scandals will face a high risk of regulatory enforcement.
How we can help
MAR requests that companies prioritise the review of existing systems and controls and consider if these controls are effectively protecting the company against unlawful disclosure of inside information. Regulators highlight the critical aspect of controls for restricting access to inside information and how staff are accessing such information. Additionally, firms need to ensure that who have access to inside information are included on insider lists.
Insider lists and the handling of client information are essential part of Compliance activities to protect firms. Automating this process helps firms to identify and monitor conflicts of interest and fight against insider trading.
With MyComplianceOffice, users can create and access insider lists fast and efficiently. These lists provide Compliance with an overview of potential conflicts when exposed to confidential information that may include material non-public information. With MCO, you can protect MNPI from insiders with ease to comply with Market Abuse Regulations and SEC securities legislation.