ESMA issues a consultation paper on a portion of MAR
ESMA has just recently issued a consultation paper on aportion of MAR, which comes into force in July this year.Central to this complicated consultation is the rules aroundmarket participants involved in a securities transactionwhere the information they are given may, or may notconstitute inside information.
As a bit of background to the market abuse regulations.ESMA oversaw the implementation of the original MarketAbuse Directive (MAD) in 2005, resulting in an EU-wideregime and framework for establishing a proper flow ofinformation to the market. In mid 2014 this regulation wasupdated, resulting in MAR coming into force on July 3rdthis year. MAR aims to further enhance market integrityand most importantly, investor protection applying totrading on regulated stock exchanges and over-the-counter platforms. The intention is that MAR strengthensthe MAD framework by extending its scope to new marketsand trading strategies by introducing new requirements.
Article 11(1) of MAR regards the communication ofinformation before the announcement of a transactionwhich intends to gauge the potential interest of investorsand the conditions relating to it (for example size and/orpricing). It provides for ESMA to issue guidelines to marketparticipants receiving market soundings (MSRs) fromDisclosing Market Participants (DMPs), outlines how issuersmay legitimately delay inside information and describessituations in which the delay of disclosure is likely tomislead the public. Moreover, MAR is designed to regulatethe way market soundings are conducted, including thetransmission of inside information. Of course, not all marketsoundings involve the disclosure of inside information. In adiscussion paper issued in November 2015, ESMA asks themarket to respond to its proposals by the end of March thisyear.
The consultation paper is particularly confusing andconvoluted but here are few relevant points we atObjectivus deem important
It is suggested MSRs might want to designate a person toreceive these market soundings and determine whetherthe MSR should agree to receive the market sounding.
Article 11(4) states that, when a DMP discloses insideinformation to an MSR this is deemed to have been madein the normal course of the exercise of a person’semployment, profession or duty, and therefore doesn’tconstitute market abuse. ESMA have proposed that MSRsshould conduct their own assessment as to whether theinformation they have received in the course of the marketsounding is inside information or not and then record theirassessment. It is also proposed in the discussion paper thatthe MSR should forward any supporting information that isin the public domain to the DMP.
ESMA believes where the MSR assesses it is not inpossession of inside information contrary to the DMP’sassessment it may disregard the prohibitions arising frombeing in possession of inside information. But, should theMSR’s assessment be wrong and they are in fact inpossession of inside information they can be pursued bythe relevant competent authority for breaching theprovisions on insider dealing and unlawful disclosure ofinside information. This will certainly encourage firms inreceipt of such information to err on the side of caution anddeem it to be inside. It is also proposed that records of anydiscrepancy of opinion be kept for 5 years.
All MSR’s staff who are entrusted to receive and processthe information received as a result of the market soundingmust be properly trained on the relevant internalprocedures and on the prohibitions arising from being inpossession of inside information. The consultation paperasks if the market agrees with the proposal of internalprocedures and staff training and whether the guidelinesneed to be more detailed and specific about the internalprocedures to prevent the circulation of inside information.ESMA also proposes for each market sounding MSRs shoulddraw up a list of the persons working for them who are inpossession of the information communicated.
The market has until the end of March to put forward itscomments and we expect the regulator to respond by theend of September.
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