#3333 - Market Abuse Crib Sheet - Public Companies and Equity Finance

Market Abuse

1. Rationale

   1. Shoring up investor confidence and reimposing market stability in the UK are seen as critically important in avoiding even worse finance and economic problems. This catches abusers who have avoid punishment for criminal offences

2. Offences

   1. Primary Offence

      1. 118(1) Market abuse is behaviour which occurs in relation to qualifying investments admitted to trading, or an application for admission has been made, on a prescribed market and falls within any one or more of the types of behaviour set out in 118(2)-(8)

   2. Secondary Offence

      1. 123(1)(b) FSMA Penalties can be imposed on a person if, by taking or refraining from taking action, he ‘requires or encourages’ another person to engage in behaviour which, if engaged in by the first person, would amount to market abuse

3. Who could be liable?

   1. Market abuser is an insider as defined in 118B FSMA

      1. 118B an insider is a person who has inside information

         1. 118B(a) As a result of his membership of an administrative, management or supervisory body of an issuer of qualifying investments

         2. 118B(b) As a result of his holding in the capital of an issuer of qualifying investments

         3. 118B(c) As a result of having access to the information through the exercise of his employment, profession or duties

         4. 118B(d) As a result of his criminal activities

         5. 118B(e) Which he has obtained by other means and which he knows or could reasonably be expected to know is inside information

            1. 118C inside information is

               1. 118C(2) information of a precise nature as defined in 118C(5)

                  1. 118C(5)(a) circumstances exists or may reasonably be expected to come into existent or an event has occurred AND

                  2. 118C(5)(b) is specific enough to have an effect on the price of qualifying investments

                     1. Ordinary shares are qualifying investments

               2. 118C(2)(a) not generally available

                  1. 118C(8) information which cannot be obtained by research or analysis

               3. 118C(2)(b) relates directly or indirectly to the issuer of a financial instrument

                  1. Section C, Annex 1 MiFID a financial instrument covers ordinary shares

               4. 118C(2)(c) would, if generally available be likely to have a significant effect on the price of the company’s shares

                  1. 118C(6) information of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions

   2. 118A(1) behaviour of the market abuser must occur in the UK or in relation to qualifying investments trading on a prescribed market in the UK

4. Is there a qualifying investment?

   1. 130A(1)(b) Treasury may specify by order what qualifying investments are

      1. PMQI Order 2001 refers to the definition of ‘financial instrument’ in Art 1(3) MAD (Market Abuse Directive)

         1. Shares & bonds are qualifying investments

5. Is the qualifying investment traded on a prescribed market?

   1. 130A(1)(a) Treasury may specify by order what prescribed markets are

      1. PMQI Order 2001 specifies the prescribed markets for the purposes of the Market Abuse regime

         1. Main Market & AIM are prescribed markets

6. Has behaviour occurred?

   1. 130A(3) Behaviour is action or inaction

   2. Types of behaviour

      1. 118(2) Insider Dealing (insider deals or attempts to deal in a qualifying investment or related investment on the basis of inside information relating to that investment)

         1. 118B defines insider

         2. 118C(2) defines inside information

         3. MAR 1.3

            1. MAR 1.3.3E A person would not be deemed to have dealt in qualifying investments ‘on the basis’ of inside information if

               1. The decision to deal or attempt to deal was made before the person possessed the relevant inside information

               2. The person concerned is dealing to satisfy a legal or regulatory obligation

               3. A person is an organisation and if none of the individuals in possession

                  1. Had any involvement in the decision to deal

                  2. Behaved in such a way as to influence the decision

                  3. Had any contact with those who were involved in the decision

            2. MAR 1.3.5E person would not be deemed to have dealt in qualifying investments on the basis of inside information if inside information is held behind an effective Chinese Wall from individuals who are involved or who influence the decision

            3. MAR 1.3.17-19 behaviour that does not amount to market abuse

               1. MAR 1.3.17 behaviour. Based on inside information relating to another company, in the context of a public takeover or merger

      2. 118(3) Improper Disclosure (Insider discloses inside information to another person other than in the proper course of his employment, profession or duties)

         1. 118B defines insider

         2. 118C defines inside information

         3. 119(2)(a) the Code can specify descriptions of behaviour that in the opinion of the Authority amounts to market abuse

            1. MAR 1.4.2E disclosure of inside information by the director of an issuer to another in a social context or selective briefing of analysts by directors of issuers or others who are PDMRs

         4. 118A(5)(a) behaviour does not amount to market abuse if it conforms with a rule

            1. DTR 1.5.2R safe harbours for market abuse

               1. DTR 1.3.4 Misleading information not to be published

               2. DTR 1.3.6 Notification when an RIS is not open for business

               3. DTR 2.2.1 Requirement to disclose inside information

               4. DTR 2.5.1 Delaying Disclosure

            2. LR 1.4.7R safe harbours for market abuse

      3. 118(4) Misuse of Information

         1. MAR 1.5

      4. 118(5) Manipulating Transactions (Behaviour that effects a transaction or orders to trade which either gives or is likely to give a false or misleading impression at the supply of, or demand for, or as the price of a qualifying investment, or secure the prices of such an investment at an abnormal or artificial level

         1. MAR 1.6.2E following behaviours are market abuse of this type

            1. Buying/selling qualifying investments at the close of the market with the effect of misleading investors who act on the basis of closing prices

            2. Wash trades – buying/selling qualifying investments where there is no change in beneficial interest or market risk

            3. Painting the tape – entering into a series of transactions that are shown on public display for the purpose of giving the impression of activity in the investment

            4. Entering orders into an electronic trading system, at prices which are higher than the previous bid or lower than the previous offer,, and withdrawing them before they are executed to give a misleading impression to demand

      5. 118(6) Manipulating Devices (Behaviour consists of effecting transactions or orders to trade which employ fictitious devices or any other form of deception)

         1. MAR 1.7.2E following behaviours are manipulating devices

            1. Taking advantage of occasional/regular access to the media by voicing an opinion about a qualifying investment while having previously taken positions on that investment and profiting subsequently from the impact of those voiced opinions

            2. Transactions designed to conceal ownership of a qualifying investments

            3. Taking a long position on a qualifying investment then spreading misleading positive information with a view to increasing its price

            4. Taking a short position and then disseminating misleading negative information with a view to driving down its price

      6. 118(7) Dissemination (behaviour that disseminates information by any means which gives a false or misleading impression by a person who knew or could reasonably have been expected to know the information was false or misleading

         1. MAR 1.8.3E amounts to dissemination

            1. Knowingly or recklessly spreading false or misleading information through the media or RIS

            2. Undertaking a course of conduct in order to give a false or misleading impression

         2. Factors to take into account

            1. MAR 1.8.4E if a normal and reasonable person would know or should have known that the information was false or misleading

            2. MAR 1.8.5E if individuals responsible for dissemination of information within an organisation could only know that the information was false or misleading if they had access to other information that was being held behind a Chinese wall

         3. MAR 1.8.6E examples of market abuse

            1. Person posts information on an internet bulletin board which contains false or misleading statements about the takeover of a company whose shares are qualifying investments and the person knows the information is false

            2. Person responsible for the content of the information submitted to a RIS submits information which is false or misleading as to qualifying investments and that person is...