As of 3 July 2016, an updated framework on market abuse will become applicable. European Regulation No 596/2014 of 16 April 2014 on market abuse (the "Market Abuse Regulation") enters into force. On 17 May 2016, the Belgian federal government submitted a draft act partially implementing the Market Abuse Regulation. As a result, the Act of 2 August 2002 on the supervision of the financial sector and financial services will be amended, and the Royal Decree of 5 March 2006 on market abuse will be repealed. On 18 May 2016, the FSMA published a circular letter with implementing instructions related to the Market Abuse Regulation.
An updated legal framework
The Market Abuse Regulation will replace Directive No 2003/6/EC of 28 January 2003 on insider dealing and market manipulation (market abuse) (the "Market Abuse Directive") as of 3 July 2016, and will expand the scope and refinement of European standards in the fight against market abuse. As a result of developments in legislation, financial markets and technology that have taken place since the entry into force of the Market Abuse Directive, a need emerged to update the legal framework on market abuse. The new requirements are laid down in a regulation so that they will be directly applicable in national law, thus ensuring a level playing field between the EU Member States.
The Market Abuse Regulation is supplemented by Directive No 2014/57 of 17 December 2015 on criminal sanctions for market abuse, and implemented by (i) Delegated Regulation No 2016/522, (ii) the implementing regulations – Regulations Nos 2016/347, 2016/378 and 2016/523, and (iii) the implementing directive – Directive No 2015/2392 – containing further technical details.
Belgian draft act no. 1835/001 appoints the FSMA as the supervisory authority, confirms that the FSMA can exercise its existing powers to investigate infringements of the Market Abuse Regulation, and increases the maximum amount of the administrative fines. No additional or stricter requirements are contained in the draft act: the maximum administrative pecuniary fines for market abuse amount to EUR 5 million for natural persons, and 15% of the total annual turnover for legal persons. In a second phase, a separate draft act will include, among other things, certain new investigatory powers being granted to the FSMA.
Expanded scope of the Market Abuse Regulation
The scope of the Market Abuse Regulation is significantly broader than the scope of the Market Abuse Directive, which only applied to financial instruments admitted to trading on a regulated market in a Member State, and to related (derivative) financial instruments.
The Market Abuse Regulation broadens the scope to include financial instruments which are admitted for trading (or for which a request for admission for trading has been made) on other (electronic) trading platforms (multilateral trading facilities ("MTF") and organised trading facilities ("OTF")), and derivative financial instruments which are traded on such alternative trading platforms or over the counter ("OTC"). Moreover, emission rights and commodity derivatives will fall within the scope of the Market Abuse Regulation.
Intermediate steps in a protracted process can qualify as inside information
The definition of inside information remains substantially the same. However, the European legislator took the opportunity to incorporate the ruling in Markus Geltl v Daimler (Case C-19/11) by the Court of Justice on 28 June 2012 into the definition of inside information. Hence, it is confirmed that, in the case of a protracted process (e.g. negotiations with a view to a merger), intermediate steps in the process can qualify as inside information which listed companies must disclose.
Broadening of the insider dealing prohibition
On the other hand, the Market Abuse Regulation expands the prohibition on insider dealing. In future, not only the placing of orders, but also the cancellation or modification of such orders by someone who is in possession of inside information will qualify as insider dealing.
Modified rules on delaying the disclosure of inside information
In principle, issuers have an obligation to immediately disclose inside information that relates to themselves. In certain circumstances, however, they are allowed to delay such disclosure. This exception, along with the criteria which need to be fulfilled in order to benefit from the exception, are maintained in the Market Abuse Regulation.
Unlike under the current regime, issuers are no longer obliged to inform the FSMA of their decision to delay the disclosure as soon as they decide to delay the disclosure, but only after the information has been publicly disclosed. The issuers will have to explain in writing to the FSMA how they have complied with the criteria for delay. Therefore, issuers should keep an internal record of the considerations based upon which they believe this exception can be invoked and, if need be, also update this record in the light of changing circumstances.
Prior communication to the FSMA of the issuer's intention to delay the disclosure of inside information is only required in exceptional cases, particularly in the situation where a credit institution or a financial institution is facing a temporary liquidity problem.
Insider lists: compulsory use of standard forms
With a view to the prevention of insider dealing, issuers remain obliged to establish (and update) lists of persons having access to inside information. To that end, issuers will have to use the standard forms that are available on the website of the FSMA. These lists must be retained for five years and may be requested by the FSMA. The issuers must also be in possession of a written declaration from each person on the insider list, acknowledging the legal and regulatory duties entailed and the sanctions applicable to insider dealing and unlawful disclosure of inside information.
Managers' transactions: extension of the notification obligation – closed period
The Market Abuse Regulation also modifies certain aspects of the obligation of persons discharging managerial responsibilities within an issuer, and the persons closely associated with them, to notify the issuer and the FSMA of any transactions for their own account relating to the shares of the issuer or to derivatives linked to those shares.
The Market Abuse Regulation broadens the notification obligation to include new transactions, such as, for example, transactions in debt instruments, the pledging or lending of financial instruments, and transactions undertaken by intermediaries, even when the intermediary can act at his own discretion.
The notification obligation only applies once a total amount of EUR 5,000 for relevant transactions has been reached within a calendar year. The Market Abuse Regulation allows the threshold to be raised to EUR 20,000, but the Belgian legislator does not seem inclined to make use of this option.
Notifications to the issuer and to the FSMA must be made within three business days (instead of five business days) after the date of the transaction, through an application for online notifications. The Market Abuse Regulation provides that the issuer should disclose the received notification, but leaves the Member States with the option to ensure that the disclosure is organised centrally by the supervisory authority. In draft act no. 1835/001, the Belgian government indicates that it favours this option. The existing practice under which notifications are published on the website of the FSMA will thus remain unchanged.
It is also important to note that the Market Abuse Regulation provides a closed (i.e. prohibited) period for transactions by "persons exercising managerial responsibilities" of 30 calendar days, before the announcement of an annual or interim financial report which the issuer is obliged to disclose. Companies will no longer be able to determine the duration of the closed period themselves as is currently the case under Belgian law. In certain circumstances, and only if the Company grants permission after a written reasoned request, the manager can be granted permission to trade during a closed period (provided that the relevant manager is not in possession of inside information).
Prohibition on market manipulation: non-exhaustive list of prohibited practices and indicators
The prohibition on market manipulation is extended inter alia to behaviour in relation to benchmarks (e.g. LIBOR or EURIBOR). Besides the extended definition, the Market Abuse Regulation contains a (non-exhaustive) list of activities which qualify as market manipulation and indicators to determine manipulative behaviour. On the other hand, the Market Abuse Regulation continues to provide a safe harbour for transactions, orders or behaviour which are engaged in for legitimate reasons, in accordance with any market practices which have been accepted following a specific procedure. So far, under the Market Abuse Directive, the FSMA has not yet determined any such accepted market practices.
Market soundings
Pursuant to section 25, 1°, b) of the Act of 2 August 2002, it is prohibited for anyone who is in possession of inside information to disclose this information to a third party, unless this happens within the normal course of the exercise of his employment, profession or duties.
This section (including the exception) remains essentially unchanged in the Market Abuse Regulation, but the European legislator has added some clarifications pertaining to the communication of inside information in the context of a market sounding, which, if certain conditions are met, will be characterised as a communication occurring within the normal course of the exercise of the employment, profession or duties, and will not result in a breach of the aforementioned prohibition.
A market sounding should be understood as the communication to one or more potential investors of information, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it such as its potential size or pricing.
In order to benefit from the market sounding exception, the disclosing market participant will have to obtain the consent of the person receiving the market sounding to receive inside information; sufficiently inform that person about the confidentiality of the information received; and inform that person of the prohibition on buying, selling, or placing orders on financial instruments to which the information relates.
Moreover, a market participant conducting a market sounding will first have to consider whether the market sounding will entail the disclosure of inside information. The disclosing market participant must keep a written record of its conclusion and the reasons therefor, and it must provide such records to the FSMA on request. The FSMA has published some guidance on the scope of this obligation in its circular letter no. 2016/8 (only available in Dutch and French).
Where information that has been disclosed ceases to be inside information, the disclosing market participant who conducted the market sounding will have to inform the investors concerned. Notwithstanding this obligation, the person receiving the market sounding must assess at all times whether he is in possession of inside information.
Obligation for intermediaries to report suspicious orders and transactions: focus on proactive detection
The Market Abuse Regulation also imposes some important new obligations on persons professionally arranging or executing transactions involving financial instruments, and on market operators and investment firms that operate a regulated market, MTF or OTF. These persons must report to the FSMA without delay any suspicious orders and transactions which could constitute (attempted) insider dealing or market manipulation (this is known as "STOR" – suspicious order and transaction reporting). This new obligation goes one step further than the current article 25bis, §4 of the Act of 2 August 2002, which only provides for the reporting of suspicious transactions. Now, it no longer matters whether, and, as the case may be, where these orders are executed (e.g. OTC transactions). The standard form that must be used for this notification is available on the website of the FSMA (only available in Dutch and French).
In addition, market operators of regulated markets, MTF or OTF, will have to establish and maintain effective arrangements, systems and procedures aimed at preventing and detecting suspicious orders and transactions. They will need an (automatic) monitoring system which analyses each transaction or each order, individually and comparatively, and which generates warnings for further analysis. These internal systems and procedures must be documented, and the analyses of the warnings must be kept for five years.