UK Implementation of MAD Disclosure Requirements for Issuers and of Managers’ Dealings

1. UK Implementation of MAD Disclosure Requirementsfor Issuers and of Managers’ Dealings Eilís Ferran, Centre for Corporate and Commercial Law (3CL) & Law Faculty, University of Cambridge

2. Mandatory disclosure • International regulatory policy rests on assumptions of market failure re. voluntary disclosure of information. • Tougher issuer disclosure requirements are part of an international trend. • ‘Upgrading’ issuer disclosure was an important element of the FSAP (MAD; Prospectus Directive; Transparency Directive; IAS Regulation). • MAD: employs familiar concepts; but detail contains uncertainties/difficulties that present implementation challenges.

3. Background to MAD Issuer Disclosure • Arts 68/81, CARD: obligation to inform public as soon as possible of major new developments in its sphere of activity which were not public knowledge and which might, by virtue of their effect on assets, liabilities, financial position or general course of its business, lead to substantial movement in share price/ability to meet commitments Art 3, IDD: no selective disclosure of inside information except in ordinary course of employment, profession or duties.

4. UK Implementation of Old Regime • Implementation in Listing Rules: • Disclosure of major new developments; • Disclosure of non-public information that, if made public, would be likely to have significant price effect (‘gold-plating’); • Disclosure subject to reasonable care standard; • Legitimate interests exemption (via regulator); • Disclosure not required of impending developments/matters in course of negotiation and such information could be circulated in confidence to prescribed groups; • Generally, no selective disclosure.

5. Regulatory Guidance Under Old Regime PSI Guide • Spirit within which investor communications to be conducted; • Guidance in key areas; • Major role for exception for confidential matters under negotiation/development; • Legitimate interests exemption intended to cover limited/exceptional circumstances.

6. MAD Issuer Disclosure Regime: New Framework • Fundamental elements implemented by Financial Services and Markets Act 2000 (as amended). • Detailed elements in FSA Disclosure Rules (broader scope than Listing Rules). • Rules and guidance in single composite text – no separate PSI Guide.

7. MAD Issuer Disclosure Regime: Core Requirements • Issuers of financial instruments must inform public as soon as possible of inside information which directly concerns the said issuers (Art 6.1, MAD). • From ‘developments’ (CARD) to ‘information’ (MAD). • Impact of this change in UK is (to some extent) muted because old UK regime was ‘super-equivalent’. • But still some areas of controversy stemming from new definition of inside information.

8. MAD Issuer Disclosure Regime: definition of ‘inside information’ – part 1 • Information of a precise nature; • Not made public; • Relating directly or indirectly to one or more issuers of financial instruments; and • If made public, would be likely to have a significant effect on prices of those financial instruments or related derivatives (Art 1.1, MAD). Concerns: could cover a broader range of information than old UK regime which defined the information disclosure requirement by reference to changes in issuer’s financial position; knowledge of external events (eg false rumours).

9. MAD Issuer Disclosure Regime: definition of ‘inside information’ – part 2 • Breadth of disclosure obligation cut down by requirement for information to be ‘precise’. • Only satisfied where: it indicates a set of circumstances which exists/may reasonably be expected to come into existence or an event which has occurred/may reasonably be expected to do so, and it is specific enough to enable a conclusion to be drawn as to possible effect of circumstances/event on price (Art 1.1, Definitions and Disclosure Commission Directive).

10. MAD Issuer Disclosure Regime: definition of ‘inside information’ – part 3 • The reasonable investor test - an added complication: information a reasonable investor would be likely to use as part of the basis of his investment decisions (Art 1.1, Definitions and Disclosure Commission Directive). • ‘Materiality’ requirement in US securities law. • ‘Reasonable user’ test in UK domestic market abuse regime (Pt VIII, FSMA 2000).

11. MAD Issuer Disclosure Regime: price effect + the reasonable investor - UK implementation • ‘Information would be likely to have a significant effect on price if and only if it is information of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions’ (s 118C (6), FSMA 2000). • ‘Information would be likely to have a significant effect on price if and only if it is information of that kind which a reasonable investor would be likely to use as part of the basis of his investment decisions’ (FSA Handbook).

12. MAD Issuer Disclosure Regime: price effect + the reasonable investor - pan European considerations • What view will other Member States take on the connection between ‘price effect’ and ‘reasonable investor’? • Implications of inconsistency. • Anti-competitive implications of (in)consistent approaches at national level.

13. MAD Issuer Disclosure Regime: price effect • No de minimis threshold. • FSA guidance to this effect in new Disclosure Rules. • Clarification rather than MAD-related change.

14. MAD Issuer Disclosure Regime: delaying disclosure • MAD requires disclosure ‘as soon as possible’ (as did CARD). • Issuers can delay disclosure so as not to prejudice their legitimate interests so long as: unlikely to mislead public; and confidentiality can be maintained (Art 6.2, MAD). • Delaying disclosure is under issuer’s own responsibility.

15. MAD Issuer Disclosure Regime: selective disclosure • Whenever an issuer, or a person acting on his behalf/for his account, discloses inside information to 3rd party in normal exercise of employment, profession or duties, he must make complete and effective public disclosure of that information simultaneously in case of an intentional disclosure and promptly in the case of a non-intentional disclosure (Art 6.3, MAD). • But qualified for confidential selective disclosures.

16. MAD Issuer Disclosure Regime:other issues • Market rumours: true and false. • Quality of disclosure. • Insiders’ lists and control of ‘access’ to inside information: Listing Principles relating to procedures, systems and controls.

17. MAD Disclosure Regime for Managerial Dealings • Persons discharging managerial responsibilities within an issuer and persons closely associated with them must notify competent authority of transactions in issuer’s shares or related securities (Art 6.4, MAD). • Public access to such disclosures must be readily available as soon as possible. • Fairness/efficiency justifications for mandatory disclosure in this area.

18. MAD Managerial Dealings Disclosure Regime: UK implementation • UK already required disclosure of directors’ dealings, and of dealings by family members/connected persons (Companies Act 1985 and Listing Rules, ch 16). • UK already restricted dealings by directors, certain employees, and connected persons (Listing Rules, Model Code). • For these reasons, MAD regime is not a radical new departure for UK, but there are many changes of detail.

19. MAD Managerial Dealings Disclosure Regime: UK implementation • Disclosure Rules require affected persons to notify issuers of transactions conducted on their own account within 4 business days. • Issuers must then make public disclosure as soon as possible (no later than end of next business day).