30 September 2020
The European Securities and Markets Authority (ESMA) has published a report on the appropriateness of certain provisions of the EU Market Abuse Regulation (MAR). The report is based on extensive feedback following a consultation paper published by ESMA in October 2019. The report concludes that, on the whole, MAR has been effective and is fit for purpose, but offers some proposals for targeted amendments to MAR and additional guidance.
MAR came into effect in July 2016 with the aim of increasing market integrity, confidence and investor protection through creating a common regulatory framework on market abuse across the EU. After 3 years, the European Commission (EC) is required to review MAR and present a report to the European Parliament and Council, proposing any legislative amendments it considers appropriate. In May 2019, the EC formally asked ESMA to advise it on these points. ESMA then released its consultation paper last October to help formulate its advice and the report of its findings and recommendations has now been released (after being delayed due to COVID).
Focus of the report
Whilst the report is very detailed (running to over 150 pages and over 250 including all the annexes), it focuses on a few key areas. These cover different topics, including looking at sanctions and delayed disclosure of inside information, but two of the focus areas in the report will be of particular interest to those looking after a company’s incentives - the appropriateness of the dealing prohibition for persons discharging managerial responsibility (PDMRs) and the notifications requirements for PDMRs and persons closely associated to them (PCAs).
Key findings in the report
- Scope of PDMR prohibition: ESMA has dropped the idea of extending the prohibition on dealing in closed periods to cover PCAs and the issuing company. Whilst ESMA felt there were benefits to including issuers (given their proximity to inside information) they felt the risks of restricting the issuer’s activity for up to 4 months a year outweighed the benefit. In terms of an extension to PCAs, respondents to the consultation were clear that there was limited advantage and significant additional burden.
- Closed periods: ESMA does not advise amending the definition of closed periods, despite the majority of respondents wanting change in response to diverging interpretations and market practices across the EU.
- Exemptions: ESMA recommends further exemptions to the PDMR prohibition on dealing in closed periods, including:
* certain exercises of options
* dividend reinvestment programmes
* some corporate transactions
* certain actions taken by asset managers
* dealings where no investment decision is taken by the PDMR
Following majority support from respondents, ESMA also recommends extending the employee share plan exemptions to include financial instruments other than shares, including sales of shares in exceptional circumstances such as severe financial difficulty.
- Thresholds for PDMR notifications: ESMA recommends retaining the current notification thresholds, currently €5,000 per individual per calendar year in the UK, but can be up to €20,000 in some member states. They concluded that the current reporting requirements adequately balance high-level market transparency with the compliance burden for issuers and PDMRs, and that it is for each member state to decide where within the €5-20k range is appropriate for them.
- Further guidance: ESMA has indicated that it intends to issue guidance on a number of points raised in the consultation, including pragmatic aspects of the notifications (such as the timing of notifications in relation to share issues and share options), the financial instruments in scope of the PDMR prohibition from dealing in closed periods and whether the prohibited action in the closed period is the decision to deal or the actual dealing.
These are the key findings in the areas we think are most relevant for incentives, but there are many other aspects of MAR covered in the report, such as the definition of inside information and the user-friendliness of insider lists, which may be of interest. A copy of the full report can be found here.
This is the first in-depth review into the appropriateness of MAR since its implementation back in 2016. Overall, the parts of MAR that have been considered by ESMA were thought to be fit for purpose, although some fine-tuning and additional guidance has been recommended.
The fact that there are no proposals to extend the closed trading period itself or to extend the prohibition to include PCAs or issuers will be welcomed by many. Equally, the extension of the exemptions to the PDMR closed period prohibition, including for exercises of options and corporate transactions, will be helpful. It is perhaps a shame that ESMA did not choose to extend these further, particularly for sales to cover tax at maturity and dealings under all-employee plans, where it is difficult to see any ‘abuse’ or ‘manipulation’ by the PDMR.
Further guidance from ESMA will also be welcome for areas of diverging or unclear interpretation, although we hope that this will not adversely affect current well-established practices.
ESMA’s review will now be submitted to the EC who will feed it into their own report of MAR, after which any legislative changes will need to be proposed and agreed through the normal European law-making channels. Legislative changes are therefore still a while off and will certainly not happen before the UK’s Brexit transition period ends on 31 December 2020. At the end of the transition period, MAR will be transposed into UK legislation and any changes that take place to EU MAR after that will not automatically apply to UK MAR, and there is no guarantee that any changes made will be adopted in the UK. It will be interesting to see how UK MAR develops and whether more useful incentive plan exemptions can be agreed that will apply in the UK. We will be working with industry bodies in the UK to consider this further as we near the end of the transition period and beyond.
Whilst changes to EU MAR going forwards will still be of interest in the UK, at least while UK MAR still mirrors the EU provisions, the changes will be of particular importance to companies that continue to be subject to EU MAR after the transition period ends. We will continue to keep you up to date with developments in both EU and UK MAR.
If you have any questions about this alert, or we can help you with any queries you have about MAR, please do let us know.
Hannah Needle FGE