5.2 Misleading Statements and Impressions | Market abuse regulation

Question 1

What does the term ‘misleading statement’ cover?

Answer 1

• Lies
• Misleading, false or deceptive statements, promises or forecasts
• Concealing material facts

Question 2

List 3 examples of misleading others.

Answer 2

1. Persuading someone to (or not to) deal, underwrite or take up rights/vote at a company meeting
2. An advisor making or omitting statements
3. Market manipulation covers any deliberate act which creates a false impression as to the liquidity, price or value of a security, for example, share price support

Question 3

List the 3 types of offences mentioned in the Financial Services Act.

Answer 3

1. Section 89 Misleading statements, e.g. lying to persuade someone to deal, concealing relevant facts in takeover documents, etc.
2. Section 90 Misleading impressions, e.g. abusive squeezes, market rigging (covers both recklessly created misleading impressions, and deliberately created misleading impressions)
3. Section 91 Misleading statements in relation to benchmarks, e.g. London Interbank Offered Rate (LIBOR)

Question 4

List 2 valid defences to the charge of Misleading Statements and Impressions.

Answer 4

1. The accused reasonably believed that his or her act or conduct would not create an impression that was false or misleading
2. The accused acted in conformity with the price stabilising rules or control of information rules

Question 5

Who enforces a charge of Misleading Statements and Impressions.

Answer 5

FCA.

Question 6

What are the penalities for a charge of Misleading Statements and Impressions?

Answer 6

• In a Magistrate’s Court the maximum penalty is a fine of £5,000 and six months in jail.
• In a Crown Court the maximum penalty is an unlimited fine and seven years in jail.

Question 7

Why was the EU Benchmark Regulation (BMR) created?

Answer 7

To address the risk that benchmarks were susceptible to manipulation, as revealed by the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) scandals. Its main provisions came into force in January 2018.

Question 8

When 2 things does the EU Benchmark Regulation (BMR) seek to do?

Answer 8

1. Ensure benchmarks are robust and reliable
2. Minimise conflicts of interest in benchmark-setting processes.

Question 9

What else does the Benchmark Regulation (BMR) also introduce?

Answer 9

A code of conduct for contributors of benchmark input data, requiring robust methodologies and controls.

Question 10

What happened to Benchmark Regulation (BMR) post brexit?

Answer 10

Following Brexit, the UK has onshored EU BMR as UK BMR. UK BMR is currently substantially the same as EU BMR.

Question 11

What kind of offence is market abuse?

Answer 11

Civil offence

Question 12

Name the document which provides guidance on what does and does not constitute market abuse?

Answer 12

Code of Market Conduct in the FCA Handbook

Question 13

What does the EU Market Abuse Regulation define market abuse offences as?

Answer 13

EU Market Abuse Regulation defines the offences as:

1. A person shall not engage or attempt to engage in insider dealing which includes:
   a) Amending and cancelling orders
   b) Recommending or inducing another person to engage in insider dealing
   c) Unlawfully disclosing inside information
2. A person shall not engage in or attempt to engage in market manipulation

Question 14

In which instances will behaviour be deemed to constitute market abuse?

Answer 14

Behaviour will be deemed to constitute market abuse if it occurs in the UK or in relation to qualifying investments traded on a prescribed market.

Question 15

What does the term ‘behaviour’ include?

Answer 15

Action and Inaction

Question 16

What is a prescribed market?

Answer 16

A prescribed market is any UK market regulated by an RIE (including AIM) and any EU regulated market as defined in the Markets in Financial Investments Directive (MiFID). This includes multilateral training facilities (MTF) and, on the adoption of MiFID II, other organised trading facilities (OTF).

Question 17

What is a qualifying investment?

Answer 17

Any investment handled on a UK RIE.

Question 18

What must behaviour categorised as market abuse need to be in relation to?

Answer 18

The behaviour must be in relation to qualifying investments. However, ‘in relation to’ means that the offence can apply to off-exchange dealings too. For example, OTC derivatives linked to exchange traded products are covered by MAR.

Question 19

What are the rules surrounding intention and market abuse?

Answer 19

The statutory definition of market abuse does not require the person engaging in the behaviour to have intended to abuse the market. It is the effect, rather than the intention of the person, that is important in determining whether market abuse has occurred or not. Nevertheless, under the new MAR regime, attempting to engage in market manipulation or attempting to engage in insider dealing.

Question 20

Which block of the FCA Handbook contains the Code of Market Conduct?

Answer 20

Business Standards

Question 21

Does a breach of the Code of Market Conduct automatically constitute market abuse?

Answer 21

Guidance contained within the Code has the authority of an evidential provision. Breach of the Code therefore does not automatically constitute market abuse, but it can be used as evidence towards demonstrating that market abuse has taken place.

Question 22

Market abuse is behaviour by one person alone or two or more people jointly or in concert which occurs in relation to which 3 things.

Answer 22

1. Qualifying investments traded on a prescribed market
2. Qualifying investments in respect of which a request for trading on a prescribed market has been made
3. Related investments of a qualifying investment

Question 23

List the 5 types of behaviour which fall under market abuse.

Answer 23

1. Insider dealing
2. Improper disclosure
3. Manipulating transactions
4. Manipulating devices
5. Dissemination

Question 24

Define what is meant by ‘Insider dealing’

Answer 24

This is where an insider deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information.

An insider is someone who has inside information as a result of:

• Membership of administration, management or supervisory body of an issuer
• Holding capital in an issuer
• Their employment, profession or duties
• Criminal activities
• Obtaining information by other means which he/she knows, or could reasonably be expected to know, is inside information

Question 25

Define ‘improper disclosure’

Answer 25

This is where an insider discloses inside information to another person other than in the proper course of the exercise of his/her employment, profession or duties.

Question 26

Define ‘Manipulating transactions’

Answer 26

This is behaviour which consists of effecting transactions or orders to trade that are not for legitimate reasons or in conformity with accepted market practices and which:
• Give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, the qualifying investment
• Secure the price of such investments at an abnormal or artificial level

Question 27

Define ‘Dissemination’

Answer 27

This behaviour consists of the dissemination of information by any means which gives, or is likely to give, a false or misleading impression as to a qualifying investment by a person who knew, or could reasonably be expected to have known, that the information was false or misleading.