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Associate legislation and regulation > Section 1 > Flashcards

Section 1 Flashcards

1
Q

Insider dealing

A 
S52 criminal justice act 1993
Criminal offence
Intent
Beyond all reasonable doubt
Seven years and/or unlimited fine
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2
Q

Misleading statements and impressions

A 
S89-91 FSA 2012
Criminal offence
Intent
Beyond all reasonable doubt
Seven years and/or unlimited fine
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3
Q

Market abuse

A 
EU MAR & FCA sourcebook
Civil offence
Effect
Balance of probability
Unlimited fine
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4
Q

Financial crime guide

A

• “A firm’s guide to preventing financial crime” which gives guidance on
- Systems and controls
- Money laundering and terrorist financing
- Fraud
- Data security
- Bribery and corruption
- Sanctions and asset freezes
• “Financial Crime Thematic Review” which shows the FCA’s opinion of
good practice/behaviour and poor practice/behaviour.

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5
Q

Market Abuse Regulation offences (MAR):

A

• Engage or attempt to engage in insider dealing
- Includes amending and cancelling orders
• Recommend or induce another person to engage in insider dealing
• Unlawfully disclose inside information
- A person shall not engage in or attempt to engage in market manipulation

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6
Q

Market Abuse Regulation penalties (MAR):

A
  • Civil in UK
    • Lighter burden of proof
    • Effect-based
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7
Q

Inside information

A

MAR defines inside information as information of a precise nature that:
• Has not been made public
• Relates, directly or indirectly, to one or more issuers or to one or more
financial instruments; and
• If it were made public, would be likely to have a significant effect on the
prices of those financial instruments or on the price of related derivative
financial instruments (that is, it is information that a reasonable investor
would be likely to use as part of the basis of their investment decisions)

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8
Q

Market manipulation

A

In brief, MAR defines ‘market manipulation’ as:
• Entering into a transaction, placing an order to trade, or any other behaviour which:
- Gives false signals as to the supply, demand or price of a financial
instrument or related spot commodity contract
- Secures the price of a financial instrument or related spot commodity contract at an abnormal or artificial level
- Employs a fictitious device or any other form of deception or contrivance
• Disseminates information through the media, or internet, or any other means which is likely to give false signals as to the supply, demand or price of a financial instrument or related spot commodity contract
• Transmits false or misleading information in relation to a benchmark, or any other behaviour that manipulates the calculation of a benchmark

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9
Q

Scope of MAR

A

• Applies to financial instruments
- Traded, admitted to trading or for which a request for admission to trading on an EEA regulated market and multilateral trading facility (MTF) or organised trading facility (OTF)
- Traded over-the-counter and which have an affect on the price or value of the above
• Applies to emissions allowance
• For the offence of market manipulation, also applies to commodity derivatives and commodity spot markets

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10
Q

Organised Trading Facility (OTF)

A

“Organised trading facility (OTF)” means a multilateral system which is not a regulated market or MTF and in which multiple third parties buying and selling interests in bonds, structured finance products, emissions allowances or derivatives are able to interact in the system in a way which results in a contract.

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11
Q

Disclosure and transparency rules (DTR)

A

The disclosure and transparency rules in the FCA handbook highlight:
• Promotes prompt and fair disclosure
• Sets out when disclosure can be delayed
• Sets out how information should be kept confidential, e.g. insider lists

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12
Q

Controlling inside information.

A

Disclosure rules have two key requirements for controlling inside information:
• Denying access – need to know basis of disclosure
• Breaches of confidentiality – requires a public ‘holding’ announcement with as much detail as possible.

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13
Q

FCA Market Conduct Handbook Guidance

A
  • Insider dealing
  • Improper disclosure
  • Manipulating transactions
  • Manipulating devices
  • Dissemination
  • Benchmark manipulation
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14
Q

Regulator sanctions for MAR

A

Withdrawal of regulated status

  • Financial penalties
  • Public statements
  • Applying to courts for injunctions and restitution
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15
Q

FCA Market Conduct Handbook Definitions

A
  1. Insider dealing
    This is where an insider deals, or attempts to deal, in a financial instrument on the basis of inside information.
  2. Improper disclosure
    This is where an insider discloses inside information to another person, other than in the proper course of his/her employment, profession or duties.
  3. Manipulating transactions
    This is behaviour which consists of effecting transactions or orders to trade that are likely to:
    • Give a false or misleading impression as to the supply of, or demand for, or price of, the financial instrument; or
    • Secure the price of such financial instruments at an abnormal or artificial level
  4. Manipulating devices
    Behaviour that consists of effecting transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance.
  5. Dissemination
    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 financial instrument by a person who knew, or could reasonably be expected to have known, that the information was false or misleading.
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16
Q

Legitimate ways to behave (safe harbours)

A
  • Share buy-back programmes and stabilisation measures
  • FCA Rules
  • Takeover Code
  • Market soundings
    • Requires formalised process, including disclosures, notifications of confidentiality and
    recordkeeping
  • Accepted market practices
    • Country-specific
17
Q

Market soundings

A

A ‘sounding’ is where a firm is hired by an issuer that wishes to tap the market for funds, but wishes to identify investor appetite for its issue and the level of the interest payable on the bonds. A sounding can include the disclosure of ‘non-public’ information which is sensitive and considered to be ‘insider information‘.

18
Q

Accepted market practices

A

The prohibition of market manipulation shall not apply providing that the firm entering into a transaction, placing an order to trade or engaging in any other behaviour establishes that the transaction, order or behaviour has been carried out for legitimate reasons and conforms with an accepted market practice.

19
Q

Suspicious transaction and order reports (STORs)

A
  • Reporting suspicions extended from transactions only, so as to include orders
  • Firms must report suspicions to the FCA without delay
    • Firms should not ‘second-guess’ whether the regulators would consider an event to be suspicious
20
Q

STORs should contain:

A
  • Identity of reporting person submitting STOR
  • Description of the order or transaction
  • Reasons for which market abuse is suspected of the order or transaction
  • Means of identifying any person involved in the order or transaction
  • Any other supporting documents needed by the FCA for investigation
21
Q

FCA guidance regarding STORs

A

A suspicious transaction or order is one where there are ‘reasonable grounds’ to suspect it might constitute market abuse, such as insider dealing or market manipulation.
Firms and trading venues should ensure that staff, especially those responsible for managing financial crime risks, are provided with effective training to identify potentially suspicious transactions and orders.

22
Q

Managers’ transactions

A

• MAR PDMR regime:
- Persons discharging managerial responsibility (PDMRs) (i.e. employees and directors) dealing in their own company’s shares must disclose to both their company, and to the FCA, within three business days of the transaction
- PDMRs must not deal during closed periods
• Year-end or half-yearly results: 30 days prior to announcement
• Breach does not constitute a criminal offence
- Disciplinary action would be taken by FCA against individual or company

23
Q

PDMR trading limit

A

MAR introduces a de minimis threshold, below which transactions will not require disclosure. This is set at €5,000 per calendar year (note that this should be calculated without netting of transactions).

24
Q

Insider dealing: Criminal offences

A 
S52 Criminal Justice Act 1993
• Dealing on…
• Encouraging others to deal on…
• Disclosure of…
Instruments covered
• Shares, ADRs, warrants
• Tradable debt
• Options, futures and CFDs
Excluded investments
• Assets with no secondary market e.g. bank account, unit trusts, etc.
• Commodities and commodity derivatives
• Spot and forward FX
• Insurance products
25
Q

Insiders

A

An individual in possession of price-sensitive information is an insider if they know that it is inside information, from an inside source.
Information comes from an inside source if they have it because:
• They are an inside source themselves
• They have access to the information by virtue of their employment, office or profession
• They have access to the information from a person that is an inside source, or by virtue of their employment, office or profession

26
Q

Control of inside information through insider lists

A

Insider lists must contain:
• The identity of each person having access to inside information
• The reason why such a person is on the insider list
• The date on which the insider list was created and updated

27
Q

Insider dealing: Defences

A

• General defences
- Did not expect the deal to result in a profit (or avoid a loss) due to the information
- Believed on reasonable grounds that the information was already publicly available
- Would have acted in the same way regardless of possessing the information
- Did not expect the recipient to deal
• Special defences
- Stabilisation
- Market information
- Market makers in the ordinary course of business

28
Q

Insider dealing: Enforcement and maximum penalty

A
  • LSE Market Operations Division monitors transaction
  • FCA prosecutes
  • Seven years and/or unlimited fine
29
Q

Stabilisation and Market information definitions

A

Stabilisation: The artificial support of newly issued share prices by the appointed issuing house.
Market information: Information that one would reasonably expect participants to deal on. For example, a predator company buying shares in the target before the takeover is announced.

30
Q

Prosecution

A

Although the FCA will use the CJA to secure a prosecution for insider dealing, the power to prosecute this offence is given to the FCA by FSMA 2000

31
Q

S89-91 FSA 2012: Misleading statements and impressions

A

• S89 Misleading statements, e.g. lying to persuade someone to deal, concealing relevant facts in takeover documents, etc.
• S90 Misleading impressions, e.g. abusive squeezes, market rigging
- Covers both recklessly created misleading impressions, and deliberately created misleading
impressions
• S91 Misleading statements in relation to benchmarks, e.g. LIBOR

32
Q

Misleading statements and impressions: Defences and maximum penalty

A
  • Reasonably believed that statement or act was not false or misleading
  • Acted in conformity with price stabilising rules or control of information rules (Chinese walls) or share buy-back rules
  • Crown court: Seven years and/or unlimited fine
33
Q

Connection to COBS

A

The legislation on Misleading Statements and Impressions adds weight to the FCA conduct of business rule, ‘fair, clear and not misleading’.

Associate legislation and regulation (5 decks)

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