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MAD Directive will herald significant changes in financial services industry Back  
The Market Abuse Directive will take an important step towards ensuring stable, transparent, integrated and efficient European markets, and while it was implemented in Ireland in July, a number of important practical provisions were just introduced on October 1st. Joe Beashel attempts to relieve some of the ‘legislative fatigue’ facing the industry caused by this and a number of other EU Directives currently being transposed by the financial services industry, by giving a broad introduction and overview of this important new piece of legislation.
Frits Bolkenstein, predecessor to Charlie McGreevy as Internal Market Commissioner, announced in May 2001, a proposal for a new Market Abuse Directive. Flagged as a ‘fundamental pillar of building an integrated European capital market by 2003’ Mr. Bolkenstein stated, in somewhat colourful terms, that ‘…the European Union has no truck with greedy financial cheats. This proposal is an important step towards ensuring stable, transparent, integrated and efficient European markets for the benefit of every consumer and investor’.
Joe Beashel

Not finalised until January 2003, the Market Abuse Directive (2003/6/EC) (the ‘MAD Directive’) was supposed to be implemented by October 2004 and not actually implemented in Ireland until July of this year. Also the deadline for implementation of a number of important practical provisions (see below) was extended until 1 October. It is one of a number of important legislative developments in the field of financial services the implementation of which has led to what many commentators have described as ‘legislative fatigue’ within the industry. We intend this article to give a broad introduction and overview of this important new piece of legislation and if possible, to relieve the fatigue a little.

These new rules only apply to financial instruments listed or where an application for listing has been made on a regulated market in the EU.

What is Market Abuse?
Market abuse includes ‘insider dealing’ and ‘market manipulation’. Insider dealing was already an offence in Ireland, up to now market manipulation has not.

The basic prohibition on insider dealing remains the same as the old regime, insiders must not misuse or seek to misuse inside information for their own or others’ advantage. The changes are in the definitions and in some new requirements such as the requirement to maintain a list of insiders (see below). Market manipulation is, as the name suggests, the actual manipulation of the market, for example, where someone (who is not necessarily an insider) tries to distort the price of a share or other financial instrument by misleading the market by engaging in artificial transactions or disseminating false or misleading information.

The definition of inside information is quite complicated comprising a number of layers each of which needs to be considered carefully:
• Inside Information is information of precise nature, directly or indirectly relating to an issuer of a financial instrument that has not been made public and would likely to have a significant effect on the price of that financial instrument or on the price of related derivative financial instrument if made public.

• Information of a precise nature is information that indicates a set of circumstances which exists or may reasonably be expected to come into existence, or an event which has occurred or may reasonably be expected to occur and is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event, as the case may be, on the prices of financial instruments or related derivative financial instruments.

• Significant effect on the price of a financial instrument means information that a reasonable investor would be likely to use as a part of the basis of his investment decision.

How this definition or rather combination of definitions, will apply in practice will take careful consideration by issuers and their advisors. Unfortunately the guidance issued by the Financial Regulator, which is the relevant enforcement authority for the MAD Directive, is not adequate in our view and in particular does not deal with industry specific issues for example, in the case of investment funds when is portfolio information ‘inside information’? When it is today’s portfolio? Does it make a difference if the portfolio information is a day, a week or a month old?
Not finalised until January 2003, the Market Abuse Directive (2003/6/EC) (the 'MAD Directive') was supposed to be implemented by October 2004 and not actually implemented in Ireland until July of this year.

Who is an insider?
An insider is someone who possesses inside information arising from their membership of a board or other administrative, management or supervisory body of an issuer, through his/her employment, profession or duties, or through criminal activities. A ‘catch all’ provision also defines an insider as ‘any other person who possesses the inside information concerned while the person knows or ought to have known that it is inside information’.

Lists of insiders
From 1 October 2005 each relevant person (i.e. the issuer, and a person acting on behalf of or, for the account of, the issuer) must draw up a list of insiders. The list must be submitted to the Financial Regulator on request and generally should state the identity of the insider, the reason why that person is on the list, and the date at which the list of insiders was created and updated. The list must be promptly updated when relevant circumstances change.

Public disclosure of inside information
An issuer must publish inside information that directly concerns the issuer without delay and in a manner that enables fast and complete, correct and timely disclosure of inside information to the public. The implementing regulations, Market Abuse (Directive 2003/6/EC) Regulations 2005, S.I. No. 342 of 2005 (the ‘Regulations’) and the Financial Regulator’s Interim Market Abuse Rules (dated 6 July 2005) set out the detail the publication obligations and relevant exemptions, for example, there is a requirement for Issuers to post on their Internet sites for a period of at least six months all inside information that they are required to publicly disclose.

Manager’s transactions
From 1 October 2005 persons discharging managerial responsibilities within an issuer (or persons closely associated with them) must notify the Financial Regulator of their own dealings in the issuer’s securities within five working days. In particular, they must notify the relevant issuer in writing within three working days of all applicable transactions and the issuer must in turn announce the notified transaction no later than the end of the business day following receipt of the information.

This affects not only directors of listed entities but also senior executives with regular access to inside information, and who have the power to make managerial decisions affecting the company’s future developments and business prospects. It also applies to closely associated persons such as a spouse, dependent children or other relatives who have shared the same household with the person concerned for at least one year on the date of the transaction.

Suspicious transactions
The Stock Exchange is required to put in place measures to prevent and detect market manipulation and the Exchange and its members are required to report to the Financial Regulator suspicions of either insider dealing or market manipulation.

The Regulations also deal, in considerable detail, with the fair presentation of investment recommendations. From 1 October 2005 those who produce or disseminate recommendations (including research) must take reasonable care to ensure that the recommendations are fairly presented and that interests in or conflicts of interest concerning the financial instruments and issuer to which the recommendation relates are disclosed. This affects investment professionals but also journalists (subject to certain exemptions). A recommendation means research or other information recommending or suggesting an investment strategy, explicitly or implicitly, concerning one or several financial instruments or the issuers of financial instruments including any opinion as to the present or future value or price of such instruments, intended for distribution channels or for the public.

The Investment Funds, Companies and Miscellaneous Provisions Act 2005 and the Regulations provide for a range of sanctions for breach of Market Abuse rule from criminal sanctions which can attract a fine of up to €10 million and or ten years imprisonment to a civil liability to pay compensation to a issuer affected, a party involved in a transaction or to all parties dealing in shares affected by a breach of the market abuse rules.

In addition, the Financial Regulator may impose a number of administrative sanctions including monetary penalty up to €2.5 million, the disqualification of a person from being concerned in the management of, or have a certain holding in, a financial service provider to a public censure. This is a new administrative sanctions regime completely separate from the Administrative Sanctions regime recently ‘activated’ by the Financial Regulator and discussed in last month’s issue of Finance.

We would agree with Mr Bolkenstein, and there is no doubt that the MAD Directive is a very important piece of legislation for the financial services industry. It changes the current law with regard to inside information and introduces new concepts such as market manipulation. Professionals involved in the preparation of investment recommendations will need to have regard to detailed new disclosure rules.

A broad range of new powers are given to the Financial Regulator which make compliance with the Market Abuse rules an imperative. The implementation of the MAD directive has required, and will continue to require, those affected to further adapt their processes and procedures and to update their regulatory knowledge in what continues to be a fast paced ever changing industry.

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