Download MAD Regulation in the UK The Impact of EU Law on the Regulation

MAD regulation in the UK
The impact of EU law on the regulation of market abuse in the UK
Martyn Hopper 23 May 2005
Contents
Background
• The pre-2001 regime – fiduciaries and intent
• The market abuse regime 2001-2005 – the elusive “effects-based” regime
• The market abuse regime post-MAD – in search of a coherent rationale
Problem areas
•
•
•
•
•
The death of the “reasonable regular user”
Materiality -vs- price sensitivity
Trading information
Prevention and detection
Consistency of interpretation and enforcement across the EU
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Background
The pre-2001 regime – fiduciaries and intent
• Insider dealing
– “insiders” who have information through their office,
employment or profession
– specifc/precise price sensitive information
– knowledge
– intention to profit
• Market manipulation
– Proof of purpose to mislead
– Proof of purpose to induce others to buy/sell
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Background
The market abuse regime 2001-2005 – the elusive “effects based”
regime
• “misuse of information”
– Any behaviour by any person “based on” relevant
information
– Source of the information is irrelevant
– FSA Code provisions make “disclosability” key
– No need to prove
» Specific /precise / price sensitivity
» knowledge of significance of information
» intention to profit
– But “based on” and “disclosability” bring some of these
concepts back
• “misleading impressions” and “distortion”
– The move towards a negligence standard for
misleading/distorting the market
– FSA Code provisions reintroduce purpose tests for many
types of manipulation
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Background
The market abuse regime post-MAD – in search of a coherent rationale
• Insider dealing
– Follows the disclosability rationale – information which
must be disclosed cannot be dealt upon
– “Insiders” are anyone who has inside information
» true insiders, or
» those who “could reasonably be expected to know”
that it is inside information
– Specific /precise / price sensitivity
– No need to prove
» knowledge of significance of information – but dealing
must be “on the basis of” the information
» intention to profit
• Market manipulation
– No purpose test for false or misleading transactions ,
disseminating misleading information or abnormal prices
– Wide prohibition of “fictitious devices or any other form of
deception or contrivance”
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Problem areas
The death of the “reasonable regular user”
• A long-stop on the 2001-2005 regime to protect legitimate trading
practices
• Post-MAD “accepted market practices” defence
– Only available in relation to false or misleading
transactions and abnormal/artificial prices
– Requires acceptance by the regulator
• Where does this leave the role of purpose in assessing allegations
of market abuse?
• To what extent is market practice relevant in assessing whether
information is likely to mislead?
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Problem areas
Materiality vs price sensitivity
• Two competing definitions
– Likely to have a significant effect on price
– Likely to be regarded as significant by reasonable
investors
• Tension between test for continuing disclosure by issuers and test
for insider dealing prohibitions – caused by abandoning the
fiduciary model for insider dealing regulation?
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Problem areas
Trading information
• 2001-2005 regime: general safe harbour for dealing on the basis of trading
information
• Post-MAD – inside information includes information about pending client
orders
• “Front-running” – an abuse on the customer or an abuse on the market?
Information
of potential
large order
Details of
unexecuted
client order
Firm order accepted
Unreported
information on
executed
trade
Trade executed
Information
on reported
trade
Trade reported
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Problem areas
Prevention and detection
• Controls over access to inside information – “need to know” policies
– What standard of protection is required?
• Requirements to record who has access – insider lists
– Who has “access”?
• Expanded directors/senior executive dealing disclosures
– Who is a senior manager?
– Who is a connected person?
• Extension of Model Code requirements to all who have access
• Suspicious trade reporting obligations
– What is the extent of intermediaries monitoring obligation?
• Research recommendations and conflicts of interest
– What does this have to do with market abuse?
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Problem areas
Consistency of interpretation and enforcement across the EU
• Will we see real harmonisation of standards?
• Do we want real harmonisation of standards?
• How will overlapping enforcement jurisdiction be managed?
• What are the implications of extending administrative fining powers
across the EU?
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Herbert Smith LLP, Gleiss Lutz and Stibbe are three independent firms which have a formal alliance
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