The EU Market Abuse Regulation (“MAR”) came into effect on 3rd of July 2016, replacing the 2003 EU Market Abuse Directive (“MAD”). The new regulation, among others, aims to enhance and harmonise the EU regime in the European financial markets on market abuse, increase market integrity, and enhance the attractiveness of securities markets. It strives to achieve this by increasing the scope of existing offences and introducing new offences on insider dealing and market manipulation.
Veronique Japp, Managing Director Equatex UK & France, provides an overview of the regulation and what Equatex’s clients need to be aware of going forward.
Why the regulation has been implemented
The EU Market Abuse Regulation is replacing a previous framework, established by a directive in 2003. The financial crisis in 2008 led to a number of reviews in the sector, including a review on market abuse that highlighted potential failings in the previous framework. There was clear recognition by the EU that discrepancies between national regulations made way for potential regulatory arbitrage, a stronger framework was needed, and the financial sector required more legal certainty and less complexity. So the objective of the new regulation is to create a more assured environment, with fewer differences between national regulations.
The key differences between the old directive and new regulation
Generally speaking, there are increased obligations on companies – more accountability and in some respect less flexibility. In terms of share plans and executive remuneration, there are key changes that clients need to be aware of:
- Insider lists – The format of insider lists and the information that needs to be included in insider lists is now very prescriptive. There’s less flexibility here as regulators look to remove any uncertainty.
- PDMRs – The regime of dealing with Persons Discharging Managerial Responsibilities (“PDMRs”) and the persons closely associated with them has changed. Notifications of transactions by PDMRs and persons closely associated with them have to be made promptly and no later than three business days after the date of transaction. The reporting requirements for the company are very prescriptive too. PDMRs now have a responsibility to notify their Closely Associated Persons (“CAPs”) of their obligations in writing, and they need to keep a copy of this notification. Clients need to be aware of what notifications need to be made and when.
- Attempted behaviours – Under the MAR, it is sufficient to have ‘‘attempted’ to commit market abuse. In the context of shares schemes, this is important as companies increasingly give employees access to their schemes through technology like portals that may not have the necessary controls to prevent an insider attempting to deal. It’s critical that all companies, with their administrators, ensure that it’s not even possible to attempt to deal.
- Companies’ responsibilities – The days of companies assuming that insiders or sensitive staff know their responsibilities are over. Companies are required to ensure that any person on the insider list acknowledges in writing the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information. The responsibility of the company is engaged if an insider, for example, attempted to trade but was never properly informed of their obligations. Communication and education around market abuse should now be a huge focus for clients.
How Equatex can help clients be compliant
If companies haven’t done so already, now is a good time to review how they communicate market abuse to their employees. They also need to review with their administrators how they maintain their insider lists and to what extent any processes – which may have an impact on market abuse – have already been automated. Equatex is here to ensure that insiders are notified; together with companies, we can implement controls and processes to prevent certain behaviours, and we can assist companies with increased reporting requirements.
Equatex technology and the new regulation
EquatePlus (our web-based platform for global compensation plans) has very good functionality in that there’s a lot of flexibility around what transactions can be blocked or subject to clearance and who is permitted to deal. There needs to be good flexibility around any elections participants make; for example, electing to receive your dividend in shares may be construed as an attempt to abuse the market, as a participant may try to reinvest their dividend in shares after receiving it in cash for years with no prior dealing on the market. So changing the election may result in something unlawful, and EquatePlus has the ability to target elections in such a way that PDMRs are excluded.
Client relationship managers are here to help
Companies will have taken different views on the previous regime and will have different controls in place. Clients will need to review what is already in place with us; our Relationship Managers can help and provide information on what functionalities are available to clients. It’s not a straightforward regulatory change and we would expect to discuss the right approach with our clients.
Typically, share plans and executive remuneration are not where you are likely to see much intentional manipulation taking place. The real risk for companies is failing to recognise the importance of employee education and awareness as well as failing to prevent unintentional behaviours. Very often, if a transaction is simply possible on a portal, it suggests to employees that it is permitted, so the door is left open to accidental behaviours.
Please get in touch with your Equatex Relationship Manager if you have any queries regarding the regulation or EquatePlus.