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Chapter 3:3 Regulation & Compliance > Chapter 3 - Insider Dealing + Misleading Statements and Misleading ImpressionsMarket Abuse > Flashcards

Chapter 3 - Insider Dealing + Misleading Statements and Misleading ImpressionsMarket Abuse Flashcards

1
Q

Explain what [A] CJA 1993, Part V covers:

A

• Covers “insider dealing” (as defined): i.e., misuse of inside information

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2
Q

Explain what [B] FSA 2012, ss.89-91

A

• Covers “misleading statements and misleading impressions” (as defined): i.e., misrepresentations and misleading the market - [A]+[B] are both dealt with in CRIMINAL courts - Using CRIMINAL standard of evidence (“beyond all reasonable doubt”)

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3
Q

Explain [C] Market Abuse Regulation (MAR) (formerly, FSMA 2000, s.118, + MAD)

A

• Covers “market abuse” (as defined): i.e., similar to [A]+[B] above - [C] is dealt with by CIVIL regulator (the FCA) - Using CIVIL standard of evidence (“balance of probability”)

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4
Q

Explain - History of Market Abuse Controls in UK

3 separate regimes since 2001:

A
  1. 1.12.2001–30.6.2005

• UK initiative: FSMA 2000, s.118

  1. 1.7.2005 – 2.7.2016

• Market Abuse Directive (MAD): FSMA 2000, s.118, re-drafted

  1. 3.7.2016 – present

• Market Abuse Regulation (MAR): FSMA 2000, s.118, and MAD repealed and replaced

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5
Q

Explain the Behaviour covered by MAR

How many are there?

A
  1. • Insider dealing
  2. • Unlawful disclosure of inside information
  3. • Market manipulation
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6
Q

What are the Financial instruments covered by MAR

How many are there?

A

Those admitted to trading (or application for admission made) on:

  1. • Regulated market (e.g. main market of LSE)
  2. • Multilateral trading facility (MTF) (e.g. AIM)
  3. • Organised trading facility (OTF) (due in 2018 under MiFID II)
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7
Q

Explain the Definition of Market Abuse Under MAR

A

A person commits market abuse where he:

  1. • engages, or attempts to engage, in insider dealing #
  2. • recommends, or induces, another person to engage in insider dealing
  3. • unlawfully discloses inside information
  4. • engages, or attempts to engage, in market manipulation #

Notes:

Where insider dealing or market manipulation are committed by a legal person (e.g. a company), they are also committed by any natural person (e.g. a director) who participated in the decision

The underlined terms (above) are defined in the following slides

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8
Q

Explain the Definition of Insider Dealing

A

A person who is in possession of inside information uses that information:

  1. To acquire or dispose of financial instruments to which the information relates (whether it is for his own account or for a 3rd party, and whether it is done directly or indirectly)
  2. To cancel or amend an order to which the inside information relates, where the order was placed before the person possessed the information

Such a person in possession of inside information may be any of:

  1. • Director (or equivalent) of an issuer
  2. • Shareholder of an issuer
  3. • Access to the information through employment, profession or duties
  4. • Access through criminal activities • Knowing tippee
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9
Q

Explain the Definition of Inside Information

How many points does it have? 4

A

Inside information has the following elements:

  1. The information is of a precise nature
  2. It has not been made public
  3. It relates directly or indirectly to one or more financial instruments
  4. If it were made public, it would be likely to have a significant effect on the price of the financial instrument (or of a related derivative)

Notes:

  1. Information is “of a precise nature” when it would enable a specific conclusion to be drawn about its effect on the price
  2. Information would have a “significant effect” on the price if it would be likely to be used by a reasonable investor to help in making a decision
  3. For persons who execute orders, inside information also includes information conveyed by a client and relating to the client’s pending orders
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10
Q

Explain the Definition of Market Manipulation

How many points? 5

A

Market manipulation comprises:

  1. False or misleading behaviour
  2. Behaviour which secures, or is likely to secure, the price of financial instruments at an abnormal or artificial level
  3. Deceptive behaviour
  4. Dissemination through the media, including the internet, of false or misleading information which the person knew or ought to have known was false or misleading
  5. Manipulation of benchmarks
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11
Q

Explain the Control of Inside Information

What should you do?

A

Disclosure of inside information

  1. Issuers must publish inside information (as defined) as soon as possible
  2. The information must remain on the issuer’s website for at least 5 years

Delaying disclosure of inside information

  1. Delaying disclosure is permissible if:

> immediate disclosure would prejudice the legitimate interests of the issuer; and
> delayed disclosure is not likely to mislead the public; and

> the issuer can ensure the confidentiality of the information

• The FCA must be notified (and may ask for full written explanation)

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12
Q

Explain Insider Lists

How many points? 4

A

Detailed requirements apply. In outline, issuers must:

  1. Maintain (and keep up to date) a list of persons with access to inside information (distinguishing between permanent and temporary insiders)
  2. Ensure that the persons on the list acknowledge in writing their duty of confidentiality (and are aware of the sanctions that apply)
  3. Remain fully responsible for the list even where it is maintained by an adviser (e.g. an accountancy or legal firm)
  4. Keep the list for at least 5 years
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13
Q

Explain Safe Harbours

How many points? 5

A

This is the term used to describe behaviour which might have a direct or indirect effect on an issuer’s share price, but which would not be subject to sanctions under the market abuse regime.

Safe harbours include:

  1. Acting in conformity with the EU’s Buy-back and Stabilisation Regulation
  2. Acting in conformity with the FCA’s rules on Chinese walls
  3. Disclosures in accordance with the UKLA’s Disclosure Rules (DTR)
  4. Disclosures in accordance with the Takeover Code’s rules on disclosure during a takeover bid
  5. Market soundings
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14
Q

Explain Accepted Market Practices and STORs

Suspicious Transaction and Order Reports (STORs)

A

Accepted Market Practices

  1. No sanction would apply to any behaviour or transaction that conforms with an accepted market practice
  2. Under MAR, these may be identified by competent authorities (eg, the FCA) and are subject to the approval of ESMA
  3. There has only ever been one example in the UK (relating to the metal market) – now discontinued

Suspicious Transaction and Order Reports (STORs)

  1. Firms (and operators of regulated markets, MTFs and OTFs) are required to report any suspicious transactions or orders to the FCA “in a timely manner”
  2. Note that this reporting obligation applies to unexecuted orders and requests for quotes as well as to executed transactions
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15
Q

Explain Investment Recommendations

How many points? 2

A

Persons producing or disseminating investment recommendations must take reasonable care:

  1. To ensure that the information is objectively presented; and •
  2. To disclose their interests or indicate any conflicts of interest

Investment recommendations also include sales notes and re- dissemination of research

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16
Q

Explain Managers’ Transactions

How many points? 4

A

[Note: The Model Code (operated formerly by the LSE and latterly by the FCA, acting as UKLA) was superseded by MAR and has been deleted from LR9, Annex 1]

Transactions by PDMRs * and closely associated persons:

  1. Must be notified to the issuer and the FCA within 4 bus. days
  2. Must then be publicly announced by the issuer
  3. Subject to a de minimis threshold of €5,000 per calendar year
  4. ‘Closed period’ (= no transactions permitted) within the 30 days before the announcement of any interim (6-mthly) or year-end financial report

[* PDMR = Person Discharging Managerial Responsibilities]

17
Q

Explain the Enforcement of Market Abuse Regime?

How many points? 2

Who can you appeal to?

A

Market abuse regime applies to all market users

FCA powers

  1. Public statement of misconduct •
  2. Unlimited fine

Appeal to Upper Tribunal (Tax and Chancery Chamber)

18
Q

Explain the Notification of Major Shareholdings (DTR 5) (1)

Which shareholdings do the rules apply to?

What is a notifiable interest?

To whom is notification made?

What is the time limit for notification?

A

Which shareholdings do the rules apply to?

  1. Holdings in any company with shares traded on a regulated market (e.g. main market of LSE) or a prescribed market (e.g. AIM)

What is a notifiable interest?

  1. Holding of 3%+ (by reference to ability to exercise voting rights)
  2. Ongoing notification required for changes of 1%+ (up or down)
  3. Voting agreements between 2+ shareholders: aggregate holdings

To whom is notification made?

  1. The company (which then makes public disclosure via an RIS) • The FCA

What is the time limit for notification?

  1. Two trading days (and disclosure by company to RIS by next trading day)
19
Q

Explain Notification of Major Shareholdings (DTR 5) (2)

A

Main exemptions from notification requirements

• Holdings of investment managers (working under written agreement) and CIS operators

  • Notification thresholds (%): 5, 10, 15, 20, 25, 30, 50, 75

• Holdings of market makers (acting as such)

  • Notification threshold: 10% (and 1%+ changes above 10%) • Stock loans
  • No notification (so long as borrower does not exercise voting rights) *********************************************************************************

• NB (also): Enquiries by company under CA 2006, s.793

  • Applies to all PLCs
  • Can backdate up to three years
  • 10% shareholders may also initiate enquiry
  • Criminal penalties (two years’ jail +/or fine) - Company sanctions (with court approval)
20
Q

Explain the Takeover Code

A

Background

  • 1960s – Growth in number/size of bids
  • 1968 – B of E > Takeover Panel > City Code

Aim of City Code

• “Fair play” (importance of “spirit”)

Application of City Code (Status of target company only)

  • Residence status: UK, CI, IOM
  • Legal status: ALL PLCs (and some private companies)
21
Q

Takeover Code

Traditional advantages of City Code (when non-statutory)

A

Traditional advantages of City Code (when non-statutory)

  • Flexible/adjustable
  • Advance consultation possible
  • Speedy decisions
  • Adherence to principles
  • Involvement of practitioners • Non-statutory language

Implementation of EU Takeovers Directive (May 2006)

  • The Panel becomes a statutory body; BUT
  • Most of the traditional advantages (above) of the Code remain
22
Q

Explain the Takeover Code – Enforcement/Sanctions (1)

Pre-2006 and continuing:

A

Panel

  1. Private reprimand or public censure
  2. Reporting offender to regulator (e.g. FCA) or professional body (e.g. Law
  3. Society, ICAEW)

FSA / FCA

  1. •‘Market Conduct’ Principle
  2. ‘Cold shoulder’ provisions
  3. Normal statutory powers over authorised persons
  4. Market abuse powers (if relevant)
23
Q

Explain the Takeover Code – Enforcement/Sanctions (2)

A

Post-2006:

Statutory powers of the Panel under CA 2006

  1. Make rules for takeover bids and implement them
  2. Require the production of documents/other information
  3. Give formal directions to secure compliance with rules
  4. Make orders for payment of compensation for breaches of rules
  5. Impose sanctions for breaches of rules/failure to comply with directions [but no power to impose a fine]
  6. Bring an action to recover unpaid Panel fees
  7. Litigate in its own name
  8. Apply to the court where rules have been (or may be) breached (and court may make such order as it sees fit to remedy position)
24
Q

Contents of Takeover Code

A
  1. Equivalent protection for all shareholders of Target
    - If control (30%+) held, other shareholders must be protected
  2. Shareholders of Target must have sufficient time and information to decide
  • Board of Target must give its views on effects of bid
    3. Board of Target must act in interests of the company as a whole
  • No frustrating action (“poison pills”) 4. No creation of false markets
  1. Bid only if can meet cash (and any other) consideration in full
  2. No undue hindrance (excessive time) in conduct of Target’s affairs 38 Detailed Rules
25
Q

How to Avoid a False Market in Shares

A

Before bid
▼
ABSOLUTE SECRECY

**************************************

ANNOUNCEMENT OF BID **************************************

After bid
▼
FULL IMMEDIATE DISCLOSURE

26
Q

Listing Rules (1)

A
  • *• “Part 6 Rules” or “UKLA Rules”**:
  • Listing Rules (LR)
  • Prospectus Rules (PR)
  • Disclosure Rules and Transparency Rules (DTR)
  • Admission to listing v admission to trading • Premium listing v standard listing
  • Conditions for admission to listing
  • Continuing obligations (incl. Model Code) • Listing Principles [see next slide]
27
Q

Listing Rules (2)

A

Listing Principles (apply to all listed companies)

  1. Adequate procedures, systems and controls for compliance
  2. CooperationwithFCA(UKLA)

Premium Listing Principles (apply to all premium listed companies)

Appropriateunderstandingonthepartofdirectors

Integritytowardsholdersandpotentialholdersofpremiumlisted shares

Equalnumberofvotesforallpremiumlistedequityshares

Differentclassesofpremiumlistedequitysharestohave

proportionate voting rights

Holdersoflistedequitysharestobetreatedequally

Disclosureofinformationtoavoidfalsemarket

Chapter 3:3 Regulation & Compliance (5 decks)

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