“The HLF proposes that companies should be given more flexibility to avoid making premature disclosures of inside information.”

– Sakari Sedbom, Senior Associate, Finance & Capital Markets

European Securities and Markets Authority (ESMA) published a review of the functioning of MAR on 23 September 2020. ESMA’s review is the first indepth review of the functioning of MAR since its implementation in 2016 and will feed into the European Commission’s review of MAR.

Proposed amendments

In its Final Report, the HLF proposes the following amendments and alleviations to MAR:

• Notion of inside information: (i) Introducing a safe harbour for the distribution of preliminary inside information, (ii) give ESMA a clear mandate to define preliminary information, as well as (iii) to refine the definition of inside information with respect to a significant price effect.
• Interaction between MAR and Transparency Directive: There is an interaction between the Transparency Directive, where investors need to be informed at predictable points in time and MAR, where information needs to be disclosed immediately at the moment it may be deemed inside information. This interaction is especially relevant for periodic financial information (annual and half-yearly financial statements), where it is challenging to identify the exact moment when the information becomes “inside” and should therefore be disclosed. Therefore, the HLF proposes that companies should be given more flexibility to avoid making premature disclosures of inside information.
• Insider lists: Amending MAR’s rule on insider lists so that only the most essential information for the identification purposes is included, as management of the insider lists is generally burdensome due to all the information issuers must gather to fill in the list.
• Manager Transactions: The threshold should be raised from the current €5 000 – €20 000 to €50 000, as the current threshold is too low and causes too great an administrative burden for listed companies with only very little benefits.
• Sanctions: Member States shall amend their respective national sanctions regimes to ensure that the amount of administrative sanctions reflects the specifics of the supervised market and is proportionate to the nature of abuse.

The HLF’s proposals relating to the notion of inside information are the most challenging. The definition of inside information is at the very core of the market abuse regime as on it depend further requirements within MAR (from the definition of insider dealing to disclosure obligations etc.). The proposals are also interesting, because the HLF’s and ESMA’s views on the need for amending the definition of inside information (MAR Article 7) and the disclosure obligation related to inside information (MAR 17) differ considerably.

Proposal to amend the definition of inside information in MAR article 7

The first major amendment proposal by the HLF relates to refining the definition of inside information with respect to what type of information should be considered as having significant price effect. In its report (p. 73), the HLF proposes to refine the assessment of a “significant price effect” in MAR by replacing the wording in Article 7(4) of MAR, which currently reads as follows:

“information a reasonable investor would be likely to use as part of the basis of his or her investment decisions”

with a new wording, to read as follows:

“information a rational investor would be likely to consider relevant for the long-term fundamental value of the issuer and use as part of the basis of his or her investment decisions”

The HLF does not provide an explanation for their proposal other than that they seek to improve legal clarity for publicly listed companies. The new wording would, on the basis of the proposed wording, probably mean that the so called “reasonable investor test”, which is decisive in assessing whether a piece of information is price sensitive, would be replaced by a new “rational investor test”. The change is significant, as price sensitivity is the key element of inside information. Therefore, a change in how price sensitivity is defined under MAR, would mean a change to what type of information needs to be disclosed to the market and also, possibly, affect what is considered as abuse of inside information. Due to lack of explanatory notes, however, it is very hard to determine the aim behind the proposal.

In its own review, ESMA deems that any changes to the definition of inside information could result in (i) increasing, rather than reducing, legal uncertainty; and (ii) cause unintended consequences deriving from the amendments, due to the connections between the definition and the other obligations under MAR. Therefore, ESMA recommends to the European Commission that the definition of inside information in Article 7 should remain unchanged – with the only exception being Article 7(1)(d), for which ESMA proposes to broaden the scope of the subjects relevant for front-running behaviours.

Based on ESMA’s view, made in their review, and lack of reasoning behind the HLF’s proposal, it seems, at least for now, that there will be very little support for the HLF’s proposal moving forward.

Proposals to amend the disclosure obligation in MAR Article 17

The second major amendment proposal made by the HLF relates to amending the obligation to disclose inside information under MAR Article 17. The HLF proposes to refine the legal framework for the public disclosure of preliminary inside information by adding a new safe harbour rule and replacing MAR Article 17(1) with text to read as follows:

“An issuer shall inform the public as soon as possible of inside information which directly concerns the issuer, unless, for the purpose of Article 17, such information qualifies as preliminary information.”

The purpose of the proposed change is to limit the obligation to disclose preliminary inside information outside the scope of the mandatory disclosure obligation. The HLF appears to consider the threshold triggering the disclosure obligation too low and that premature disclosures in some cases may potentially affect the outcome of an event that is at a very preliminary stage (e.g. a CEO’s plan to potentially step down, board members discussing potential ideas of mergers, preliminary risks of litigation, etc.).

Under the current MAR, issuers are allowed to delay the disclosure of inside information, if all conditions set out in MAR Article 17(4) are met. In practice, the rule allows issuers to delay the disclosure of preliminary information. If information that is currently defined as inside information would in the future be considered only as preliminary information, it would diminish the whole purpose of Article 17(4). Therefore, the HLF’s proposal may turn out to be non-functional.

In its own review, ESMA deems that no amendments to the conditions to delay the disclosure of inside information are necessary. Therefore, it is interesting to see if there will be any support for the HLF’s proposal to introduce the new concept of preliminary information.

According to the European Commission’s action plan (A Capital Markets Union for people and businesses-new action plan), published on 24 September 2020, the Commission will assess the potential simplification of the market abuse regime by Q4/2021.