Must 'price sensitive' or 'inside' information of issuers of UK listed securities ("Issuers") always be immediately disclosed to the market or may disclosure be deferred?
The relevant rules are contained within the EU Market Abuse Regulation [Regulation 596/2014] ("MAR"). They have operated since 3 July 2016 with direct legal effect in the UK. MAR has replaced previous local UK law (the Disclosure Rules) introduced to implement the former EU Market Abuse Directives [2003/6/EC and 2003/124/EC].
The switch from UK law implementing the Market Abuse Directives to direct EU law in the form of MAR is not just a change in form. It involves some subtle yet important changes in both what the rules actually require and what may thus be permissible as exceptions to the disclosure obligation.
Former UK law on when disclosure of inside information may be deferred had for a number of years been more onerous than the minimum standards mandated by the former Market Abuse Directives. This article considers the substantive changes introduced by MAR, compares the new rules with the previous Disclosure and Transparency Rules ("DTR"), and examines the new guidelines ("ESMA Disclosure Guidelines") produced by the European Securities and Markets Authority ("ESMA") covering, amongst other matters, delay in the disclosure of inside information [ESMA/2016/1478], (which came into force on 20 December 2016), and the UK Finance Conduct Authority's ("FCA") consultation paper in response on proposed changes to DTR 2.5 [CP 16/38].
It is submitted that the rules permitting delay in the disclosure of inside information by Issuers in the UK are now of wider scope, and hence more flexible, as a result of MAR coming into force, and that the guidance and opinions of the FCA do not yet fully recognise and reflect the full extent of recent changes in the substantive law in this area.
According to the FCA, MAR marks a step change in the EU market abuse framework. It takes the form of an EU regulation rather than an EU directive, so under EU law it applies directly in all member states. This ensures consistency across the EU by preventing different approaches in the way member states implement the legislation [see the FCA's CP 15/35, at 3.13]. While the FCA remains the national 'competent authority' responsible for market abuse enforcement in the UK, pending Brexit, any MAR related controversy can ultimately be appealed to the European Court of Justice, since the latter acts as the ultimate arbiter on questions of market abuse.
As a result of MAR, pending Brexit, the power of the FCA to set the Disclosure Rules has been removed from the Financial Services and Markets Act (2000) ("FSMA"). The previously applicable 'Disclosure Rules' have in consequence been substantially amended and re-designated as 'Disclosure Guidance'.
Similarly, the FCA's power to make the 'Code of Market Conduct' has been repealed, with the 'Code' now substantively amended to provide guidance only.
C. The basic disclosure obligation
MAR 17(1) sets out the basic obligation (subject to exceptions) upon an Issuer to publicly disclose inside information, as follows:
1. An issuer shall inform the public as soon as possible of inside information which directly concerns that issuer.
The term, 'inside information', is defined at MAR 7. This definition replaces the definition formerly found at section 118C of the FSMA but apart from an extension/clarification of the definition as it applies to a 'protracted process' in MAR 7(2) and (3), there is little substantive change from the former definition under section 118C.
D. The MAR 17(4) exception permitting delayed disclosure
MAR 17(4) sets out the main exception for when the obligation to disclose under MAR 17(1) may be delayed, as follows:
4. An issuer […] may, on its own responsibility, delay disclosure to the public of inside information provided that all of the following conditions are met:
In the case of a protracted process that occurs in stages and that is intended to bring about, or that results in, a particular circumstance or a particular event, an issuer or an emission allowance market participant may on its own responsibility delay the public disclosure of inside information relating to this process, subject to points (a), (b) and (c) of the first subparagraph.
All of the conditions listed at (a), (b) and (c) must be met in order for the exception to be available, and these must all continue to be met in order for it to be permissible to maintain the delay.
MAR 17(11) mandated the ESMA to issue ESMA Disclosure Guidelines so as to establish a non-exhaustive indicative list of:
Each of the conditions listed in MAR 17(4)(a),(b) and (c) is considered below, in light of the ESMA Disclosure Guidelines.
A separate and much more narrowly drafted exception permitting delayed disclosure applies under MAR 17(5), with respect only to credit and financial institutions, where the delay is in order to preserve the stability of the financial system. That exception is outside of the scope of this article.(a) Immediate disclosure is likely to prejudice the legitimate interests of the issuer
The ESMA Disclosure Guidelines provide as follows:
"…, the cases where immediate disclosure of the inside information is likely to prejudice the issuers' legitimate interest could include but are not limited to the following circumstances:
Examples (a), (b) and (c) are on similar terms to guidance presently provided by the FCA at DTR 2.5.3(G) (which reflects Recital 50 of MAR and, formerly, provisions of the Market Abuse Directives).
At the time of writing, the FCA proposes to delete DTR 2.5.3(G) because the guidance is now substantively covered by the ESMA Disclosure Guidelines [CP 16/38 at 2.9].
FCA guidance at DTR 2.5.4(G), however, is proposed to be substantively retained but in the revised form of guidance as to the application of examples (a) and (b) of the ESMA Disclosure Guidelines (rather than further guidance upon DTR 2.5.3(G), as is presently the case) [CP 16/38 at 2.10].
Instead of providing formal 'guidance' on what was formerly expressed to be "not allowed", DTR 2.5.4(G) is now proposed to merely express that "In the FCA's opinion", examples (a) and (b) from paragraph 5 of the ESMA Disclosure Guidelines "do not envisage" that an issuer will :
The proposed change in the language of DTR 2.5.4 to refer to the FCA's 'opinion' reflects the substantive changes to the law on market abuse in the UK, with the ECJ now being the final arbiter on matters falling under MAR.
Importantly, as a matter of law we do not think that the "opinion" of the FCA, as proposed to be expressed in the amended DTR 2.5.4(G), accurately reflects European law and may thus be confusing or potentially even misleading to Issuers and their advisers.
The view of the FCA is that the guidance provided by it at DTR 2.5.4G is appropriate to retain because it has no direct equivalent in the ESMA Disclosure Guidelines, and the FCA "consider that it contains useful information for issuers…". In the FCA's view, examples (a) and (b) of the ESMA Disclosure Guidelines should be read together, in line with Recital 50 to MAR, and that "there has been no intended change in scope regarding this particular legitimate interest" [FCA CP16/38, at 2.10]. We would agree that this is true as a matter of EU law but the FCA's comments ignore the fact that UK law, as promulgated by the FCA, was stricter than the position under EU law. The repeal of relevant UK law on market abuse means that much of that additional gold-plating previously promulgated by the FCA no longer applies. DTR 2.5.4(G), as it was formerly expressed, was an example of such 'gold-plating' that exceeded and had no basis in the mandatory requirements of the Market Abuse Directives.
In our view, whether the disclosure of circumstances of severe financial difficulty could be delayed for a period should be considered carefully on a case by case basis against the terms of MAR 17(4), rather than Issuers or their advisers simply accepting at face value the opinion of the FCA expressed in DTR 2.5.4(G), or even requiring that the factual circumstances must strictly fall within the terms of one of the examples given in the ESMA Disclosure Guidelines before disclosure may be delayed. ESMA and, before that, guidance of the Committee of European Securities Regulators ("CESR") repeatedly stressed the non-exhaustive nature of the examples being provided as guidance. The FCA's proposed guidance in the form of the revised DTR 2.5.4(G), in our opinion, no longer reflects an accurate view of a matter which is now governed directly by European law.
Elsewhere in the consultation paper, however, the FCA do recognise and respond to the change in substantive law. The final sentence of DTR 2.5.5(G) was a further separate piece of FCA 'gold-plating' of the Market Abuse Directives, which included the statement that "the FCA considers that, other than in relation to impending developments or matters described in DTR 2.5.3G or article 17(5) of the [MAR], there is unlikely to be other circumstances where delay would be justified." This additional FCA guidance significantly limited the ability of Issuers to conclude that the circumstances justified their deferring disclosure, notwithstanding that the Market Abuse Directives emphasized that the examples given of circumstances where delay in disclosure might be justified were "non-exhaustive". The final sentence of the DTR 2.5.5(G) statement is now, however, proposed to be deleted.
The ESMA Disclosure Guidelines also introduce further examples at (d), (e) and (f) which were not previously included in the DTR's, although examples (d) and (e) had previously been provided as guidance in 2007 by CESR [CESR/06-562b]. In introducing these additional examples, the guidelines plainly broaden the (non-exhaustive) scope of what falls within the legitimate interests of an Issuer which might be prejudiced by premature disclosure of 'inside information'.
Curiously, one of the previously more 'liberal' pieces of FCA guidance regarding delaying disclosure is proposed to be retained, at DTR 5.2.5(G). That provision states that "An issuer should not be required to disclose impending developments that could be jeopardised by premature disclosure." This retained FCA guidance reflected previous guidance from CESR, but its proposed retention under the new MAR regime stands out because this particular piece of CESR guidance was expressly considered but discarded by the ESMA when producing the ESMA Disclosure Guidelines, for the reason that it was deemed by the ESMA to be "too generic", bearing in mind that the list of examples provided in the guidelines "is not meant to be exhaustive and issuers may be in other situations where they have legitimate interests to delay the disclosure of inside information" [ESMA/2016/162 at 69].
A significantly less rigid regime now applies in the UK with regard to what might constitute the 'legitimate interests' that an Issuer may have, and the prejudice which might justify delaying the disclosure of inside information. This should permit Issuers better to take into account their widely differing circumstances in managing disclosures fairly. Issuers should thus consider their unique circumstances against the terms of MAR 17(4), in light of the ESMA Disclosure Guidelines, but bear in mind that even those merely "provide a non-exhaustive and indicative list of legitimate interests that are likely to be prejudiced by immediate disclosure of inside information" [ESMA/2016/1478, at para.2].(b) Delay of disclosure is not likely to mislead the public
Condition (b) of MAR 17(4) ("delay of disclosure is not likely to mislead the public") continues to be expressed in the same terms as applied under the Market Abuse Directives. It is a curiously drafted provision in that it is a negative condition (it must not be the case) which is concerned to avoid the absence of something (the absence of an announcement) having a positive effect (that the public is misled). It is perhaps not surprising that the proper construction of this provision has been the subject of some confusion and debate.
Since 2005, the FCA's guidance on this condition was of rather limited utility. DTR 2.5.2(1) simply stated that "Delaying disclosure of inside information will not always mislead the public, although a developing situation should be monitored so that if circumstances change an immediate disclosure can be made." This left open the question of the duty of the Issuer where it knew that the market was trading on a misinformed basis, even if through no fault of the Issuer. Subsequent guidance from CESR was of similarly limited assistance, although CESR did note that it was aware of, but did not agree with, the argument that "any delay in disclosing [inside] information would be misleading", because "If this argument were correct, then clearly there would have been no purpose in including a provision in the Directive which allowed for delay since the criteria for doing so could never be met." [CESR/06-562b at 2.12]
Surprisingly, in its 2013 Discussion Paper in respect of the draft ESMA Disclosure Guidelines, the ESMA initially proposed the opposite position - that disclosure "will always be required where the undisclosed inside information contradicts the market's current expectations." [see ESMA/2013/1649 at 307]. That initial ESMA approach, however, was sensibly subsequently discarded. In its subsequent 2015 Consultation Paper, the ESMA noted general opposition to its previously stated approach, principally because it had been observed that 'inside information' will always, by definition, contradict current market expectations [see ESMA/2016/162 at 96, 98]. The non-exhaustive examples ultimately introduced in the ESMA Disclosure Guidelines are as follows:
…the situations in which delay of disclosure of inside information is likely to mislead the public includes at least the following circumstances:
The three examples above all plainly involve the Issuer having made some previous disclosure or other communication, which makes the subsequent delay in the disclosure of inside information 'misleading'. Examples (a) and (b) relate to where the public is now misinformed as a result of previous announcements by the Issuer. Example (c) relates to the 'inside information' being in contradiction of market expectations, but only where those market expectations have been based upon some form of communication from the company.
Whilst the examples provided by the ESMA Disclosure Guidance are 'non-exhaustive' and are examples of situations where delay in disclosure is likely to mislead the public, as opposed to providing examples of situations which would meet the requirement of MAR 17(4)(b) (ie, the delay is not likely to mislead the public), the consultation process shows that the ESMA has considered and ruled out the idea that disclosure cannot be delayed if the market is trading on a misinformed basis, subject to the Issuer not having contributed to the misinformation.(c) The issuer is able to ensure the confidentiality of that information
Once the confidentiality of any 'inside information' appears to have become compromised, MAR 17(7) applies to require immediate disclosure on the following terms:
MAR17(7) replaces DTR 2.6.2(R) and DTR 2.7.2(G), which were of similar substance but are proposed to be deleted.
The FCA intends to retain DTR 2.6.3(G), which provides that if an Issuer is relying upon MAR 17(4) or (5) to delay the disclosure of inside information then it should be prepare a holding announcement, to be disclosed in the event of an actual or likely breach of confidence. Any holding announcement should comply with DTR 2.2.9(G) (which will continue to apply). Alternatively, if an Issuer cannot or will not issue a holding announcement, then trading in its securities should be suspended, per DTR 2.2.9(G)(3).
E. Procedural requirements where disclosure has been delayed
Whilst MAR 17(4) permits the delay of disclosure where conditions (a)-(c) are met, it also potentially imposes an obligation upon the Issuer privately to notify the competent authority, in the following terms.
Where an issuer […] has delayed the disclosure of inside information under this paragraph, it shall inform the competent authority specified under paragraph 3 that disclosure of the information was delayed and shall provide a written explanation of how the conditions set out in this paragraph were met, immediately after the information is disclosed to the public. Alternatively, Member States may provide that a record of such an explanation is to be provided only upon the request of the competent authority specified under paragraph 3.
After public consultation, the FCA (as the 'competent authority') has decided that Issuers are required to provide an explanation of kind referred to above only on the request of the FCA.
Nevertheless, the need for Issuers to weigh up the circumstances surrounding any decision to delay disclosure against conditions (a)-(c) suggests that Issuers would be well advised to formally record in writing (at the time the decision is made) the basis upon which it had decided that each of conditions (a), (b) and (c) were satisfied. This is so that such record may be promptly provided to the FCA if requested to do so, and so as to also provide a clear audit trail of the decision-making process (as was also recommended by CESR in CESR/06-562b [at 2.11]).
Any regime of continuous public disclosure by Issuers must strike a balance between the interests of investors generally (ie, the 'market') in receiving a high level of disclosure from Issuers, and the interests of the Issuers themselves, who often require a degree of confidentiality in order to conduct their business in a competitive environment. London's role as a major global financial market (where many Issuers are foreign or multinational businesses) has arguably tended to lead UK regulators to adopt a position that was more protective of the interests of investors. EU law and regulators are also naturally highly concerned with protecting investors, but have maintained an approach that included a greater degree of sympathy for the interests of Issuers listed on European markets (a greater proportion of which represent domestically based businesses) than has typically been the case in the UK.
Whilst the Market Abuse Directive applied across the EU, it mandated only minimum standards and so provided the FCA with the ability to maintain a stricter approach to rules on market disclosure than was generally the case elsewhere in the EU.
The EU approach to market disclosure, however, now represents UK law on the topic following MAR coming into force.
Overall, the coming into force of MAR (including the ESMA Disclosure Guidelines) represents an apparently small, but significant substantive change to the regime for the disclosure of inside information for Issuers in the UK. This is a result, in particular, of:
(i) the widening of the potential scope of what might constitute prejudice to the legitimate interests of the Issuer by:
- previous UK 'gold-plating' of the rules and guidance on disclosure (including DTR 2.5.4(G),) no longer having legal force, but representing only the 'opinion' of the FCA;
- he deletion (through the removal of DTR 2.5.5(G)) of a material constraint on what might be taken to prejudice the legitimate interest of the Issuer;
- the inclusion of new examples ((d), (e) and (f), in the ESMA Disclosure Guidelines) of where a legitimate interest of an Issuer might be prejudiced; and
(ii) helpful clarification around when a delay in the disclosure of inside information is (and, arguably, is not) likely to mislead the public, through the provision of examples in the ESMA Disclosure Guidelines of examples of circumstances where the omission of disclosure would be 'likely to mislead' the public.
FCA guidance on disclosure requirements obviously remains of significant importance. But Issuers and their advisers should now pay much more careful attention to the terms of MAR itself, with the assistance of the ESMA Disclosure Guidelines and other EU guidance and, ultimately, developing EU case law, at least unless and until Brexit has a specific impact on this area of regulation.