The Transition of the EU Securities Market Abuse Regulation (No 596/2014) to the Post-Brexit Statutory Instruments Applied to the Capital Market in the UK: Is the example relevant to the Lao integration effort in the IOSCO?

The Transition of the EU Securities Market Abuse Regulation (No 596/2014) to the Post-Brexit Statutory Instruments Applied to the Capital Market in the UK: Is the example relevant to the Lao integration effort in the IOSCO?

By: Xaypaseuth Phomsoupha, PhD

Solicitor-at-Law

Researcher & Author

  1. Introduction

Securities trading is characterized by fairness, transparency, and integrity without distorting information and market setting.[1] Historically, non-public available data, known as inside information under certain circumstances, remains a core theme in regulatory reform.[2] Insider dealing and market abuse have become critical challenges that reasonable traders and regulators encounter in an equal dimension in the EU and UK.[3] The transition contemplated hereunder may provide suitable lessons for emerging securities markets to maintain integrity.

This paper focuses on an inside information definition,[4] which may have piggybacked on the principles in the EU regulation.[5] Referring to the EU laws and UK acts, including relevant statutes, and directives, the author analyses the inside information definition hereunder. The author tries to bring part of his research work on UK securities trading to the attention of an academic theme of the Lao law institutions providing international corporate finance law and relevant law practitioners in the Lao jurisdiction.

  1. Definition of Inside Information

2.1. Legal Background

Historically, market distortion resulting from inside information appeared in the United States in the early last century before the EC attended to inside information classification in the 1960-1970s.[6] At the outset, the two camps had distinctively argued for advantage and against the ramifications of the inside information; however, they later concluded that inside information posed a threat to market viability.[7] On the EC side in the 1970s, West Germany spearheaded a campaign by engaging a government body to redress inside information seriously and issue recommendations to prohibit people first in the inner circle, including board members, shareholders, and employees of a company, selling and buying stocks and bonds on information they might have received through inappropriate channels.[8] In the late 1990s, the EU and Commission agreed to reform regulations pertinent to the financial services sector to combat market abuse to attain an effective single market.[9] In the UK, the regulatory and supervisory bodies have evenly reformed several regulations and directives in respect of securities trading aimed at enhancing financial services.[10] Since then, inside information has been seen as detrimental to market integrity.

2.2. Nature

To answer the question of what insider information means, the author looks at the matter from the historical perspective in combination with the capital market evolution in the EU and UK.[11] When individuals in a company which issues securities release non-public data on stocks and bonds, for instance, including but not limited to figures, policies, and board decisions, the usage of which affects bidding prices, the latter fall into inside information.[12] Precise data regarding financial instruments and derivatives relating to one or more issuers are kept in a non-public domain; misuse of such information adversely impacts the transaction process.[13] Arguably, when an internal member unintentionally spreads rumours about the issuer’s financial details, potentially causing pecuniary damage to potential bidders, the rumoured nuances may be debatable by participants.[14] In the electronic era, several claims of specific data as to whether or not they are inside information found in commercial contracts ended up being subjected to litigation challenges.[15] Thus, inside information must be defined according to relevance, usage, and normative practices, as presented in the following sub-section.

2.3. Applications

The threat of inside information attracted public attention since the second half of the last century.[16] The EU Market Abuse Regulation provisions currently enforced and retained in the UK legislation[17] forbid persons, whether natural or juristic, inside or outside the premises, from using confidential matters likely to cause market misfunctioning.[18] Directive 2014/57/EU on market abuse has established principles for member participants to deal with inside information according to the rules failing which a criminal sanction will be imposed.[19] Individuals who are likely to deal with insider dealing are; (i) executives, (ii) shareholders and capital owners, (iii) staff members and consultants, and (iv) other people related to the group, as mentioned above.[20] Nonetheless, Article 8(5) of Regulation 2014/57/EU imposes criminal sanctions on insider trading activities only on individuals who are residents of any member state.[21] Inside information also includes trade secrets illicitly possessed by the internal staff of an issuer company, which were passed by an insider, tipper, onto an outsider, known as a secondary insider or tippee.[22] Corporate financial details known to short-term lawyers, chartered accountants, consultants, contractors, suppliers, and financiers, may fall into inside information.[23] One may argue whether or not specific data merely overheard from a telephone conversation with a corporate finance specialist but used in no place at no time is considered inside information. The EU law further perceives a tippee as a secondary insider who improperly obtains non-public information from those related to a company.[24] On the foregoing account, inside information is embodied as long as a user knows or ought to know that a first-ever insider or tipper has improperly rendered the delivery.[25] The EU legislation has evolved continuously to help authorities combat irregularity in the securities markets.

  1. Can the Inside Information Definition be Used Outside the EU?

3.1. Interpretation

As qualified hereunder, inside information earlier used by one or more participants in the same transaction creates a disadvantage to others who ought to be aware of or know about such a piece of information at a later stage.[26] Issuers in any member state must make financial instruments known to the public immediately so long as such financial instruments are directly related to the foregoing issuers.[27] In Geltl v Daimler AG,[28] the news of CEO Schrempp’s retirement and the succession of Zetsche was formally released by the communication manager of DaimlerChrysler and thereafter was contested by investors, who sold out their shares just before the announcement. The German Federal Court (“BGH”) ruled that the news of the CEO’s retirement fell into inside information and, to that end, influenced share prices.[29] After the BGH reconsidered the appeal, complemented with an argument against the inside information interpretation of not being complied with the purpose of the MAD,[30] the Federal Court issued a new judgement different from the first ruling.[31] The European Court of Justice (“ECJ”) reaffirmed the aims of the MAD 2003 by stating that ignorance of intermediate steps in a protracted process of securities transactions could result in misinterpreting inside information and, thereby, misaligned with the purpose of the MAD.[32] The BGH further communicated with the ECJ, seeking clarification of the inside information interpretation acceptable to all member states. Referring to the MAD,[33] the ECJ postulated that restriction of the legislation scope absent a prudential approach to addressing circumstances ahead could undermine the objectives for attaining integrity in the single financial market.[34] Precise data of a securities issuer can be treated as inside information depending upon the users’ understanding, considering the issuer’s timing, relevance, delivery and circumstances surrounding the transactions.[35] Securities transactions jurisdiction influences the interpretation of inside information to a great extent and hence, frames financial activities undertaken by the market participants.

3.2. From Theory to Practice

One may relate inside information to financial activities, which create market misfunction and misalign with the law of supply of demand. Self-regulation of a securities market cannot occur in any circumstance and jurisdiction due to changing environment.[36] To ensure integrity in the single market for all member states, at the behest of the EU Commission, the responsible regulatory body adopted the Market Abuse Directive in 2003 to boost investors’ confidence.[37] The Directive aims to stifle malpractices in the markets of people who possess information concerning financial instruments from misusing such information.[38] When the UK was an integral part of the EU, the FSMA and other pieces of legislation enacted by the FCA, PRA, and FPC incorporated anti-market abuse measures.[39] In the post-Brexit era, FSA 2021 retains relevant EU MAR provisions and tweaks several inside information provisions to fit the UK’s financial environment.[40] In Bradly Jones v JP Morgan Securities PLC,[41] the Claimant, who was an employer of the Respondent from 2012 to 2020, entered the Respondent’s computer system notice sell orders for shares, contemplated as inside information, in a client named Logitech International; the Claimant was later accused of gross misconduct and consequently was dismissed from his post by the Respondent. The Claimant brought a court case against his employer, who claimed the losses to multiple businesses, including cash equities, foreign exchanges, and precious metals, due to the alleged misconduct of his employee.[42] At some later stage in 2016, the Respondent acknowledged that the Claimant’s action was not spoofing or phishing that could make the data the Claimant saw while conducting his duty into inside information.[43] However, the Respondent introduced a new spoofing policy in 2019 and retroactively blamed the Claimant for misconduct of the same action in 2016 and confirmed the Claimant’s dismissal.[44] Knight J ruled that the Claimant’s action in 2016 did not fall into insider trading as no inside information was identified; on that basis, the Claimant did not constitute a condition for his dismissal in 2020.[45] The cases of DaimlerChrysler and Bradly Jones v JP Morgan were instituted in protracted processes; however, the inside information interpretation in each case resulted in different outcomes.[46] Arguably, inside information relating to insider trading is precise in substance but may not be precisely defined under certain circumstances.

3.3. Statutory Instruments and Case Laws

In the wave of the UK regulatory reform, the MAR substitutes for the previous MAD, aiming at ascertaining purposes of inside information classification.[47] Under many circumstances, parties, who use information inadvertently for their own interests and other people directly or indirectly connected to them, are convicted in civil cases.[48] In FCA v Papadimitrakopoulos, Dimitris Gryparis,[49] the FCA made use of information referred to as “the MLA Material”) without the knowledge of relevant authorities, causing financial damage to the two defendants. After several court proceedings, Smith J ordered the FCA to pay compensatory costs of GBP70,000 to one of the defendants within 14 days following the judgement.[50] Currently, the FCA regulates how and to what extent the authorities cope with inside information misuse, codified under the listing rules to attain integrity in the post-Brexit financial market.[51] The MAR published core requirements in respect of inside information, including inside information disclosure and insider dealing and unlawful disclosure.[52] In Conor Foley v Financial Conduct Authority,[53] Mr Foley, the former CEO of WorldSpreads Limited (“WSL”) and WorldSpreads Group Ltd (“WSG”), was charged with market abuse by making explicitly written misleading statements to the market in formal transactions during 2010 – 2012, inducing an increasing demand for shares in WSG while the two companies were entering insolvency. After he resigned from business some years later, Mr Foley joined the academia at Trinity College Dublin; to avoid a negative impact on his teaching career, Mr Foley submitted Privacy Applications to the Authority to omit his reference in the FCA of the Decision Notice published by the Authority as the latter would jeopardize Mr Foley’s academic career.[54] Referring to the FSMA, the FCA imposed a pecuniary penalty amounting to GBP658,900 on Mr Foley for his misconduct and dishonesty during his business profession.[55] In deciding the case, the courts applied principles in the case laws in Prodhan v FCA,[56] Arch Financial Products LLP, and others v FSA.[57] After deliberation by the Upper Tribunal, Herrington J dismissed the Privacy Applications and ruled that the Decision Notice must have been marked “Provisional” in any press release.[58] However, the Court provided an opportunity of 21 days for Mr Foley to discuss the subject matter with Trinity College before the publication took place.[59] Arguably, the court decision has arrived from the facts that Mr Foley failed to provide satisfactory evidence for the tribunal because a well-paid lawyer might not have supported Mr Foley compared to the FCA solicitor.[60] Equitably, the proceedings would have been fair for Mr Foley if Herrington J provided an equal chance for the Applicant to have access to a better team of solicitors in appealing the case before the competent court at the next level. Different courts of competent jurisdiction may argue about Foley’s past conduct regarding whether or not to fall into insider dealing.[61] In combating market irregularity, judicial power must strike a balance between legal representations, failing which imbalance may occur in the procedural stage.

3.4. Acceptability

As most centres of main interests of financial transaction agreements are governed by and interpreted in accordance with English law, any case thereof is subject to the common law judicial power.[62] The practical measures to prevent inside information must be acceptable by authorities and businesses in any member state where a transaction is made and in a place of litigation, failing which litigation cost may be beyond the bearable level of the parties involved.[63] However, one may argue that inside information, as defined under the EU MAR,[64] is also limitedly codified by the civil law system’s trust, property ownership, and assignment provisions; many cases may be instituted and decided in English courts of competent jurisdiction. Thus, the inside information definition must be universal, applying to any jurisdiction.

  1. Conclusion

Since the second half of the last century, the EC, presently known as the EU, codified provisions prohibiting insider trading relating to inside information to achieve integrity in the continental financial market.[65] Case laws fill gaps in the inside information definition by incorporating factual circumstances surrounding the cases.[66] Under the precedent law environment, case laws have addressed new phenomena in respect of inside information vis à vis insider trading.[67] Individuals and businesses domiciled in the EU and UK are aware of the threats posed by inside information, the classification of which must be universally acceptable.[68] The BGH initiated discussions on inside information with the ECJ to agree with the general objectives.[69] The regulatory and supervisory bodies, including the FCA, PRA, and FPC, continue reforming the applicable legislation to attain fairness, transparency, and integrity in the UK post-Brexit financial market.[70] The enforcement of anti-market abuse legislation has evolved continuously in the changing legal environment.

The authorities take a tough stance to prohibit trading on non-publicly available information by improving statutory instruments to fit public interests in redressing malpractices in securities trading.[71] In Bradly v JP Morgan, Knight J ruled out inside information because the proceedings process was carried out over a long period making inside information interpretation as per the facts surrounding the proceedings in each stage.[72] To this end, inside information initially defined under the EU regulations is fit for purpose when application provisions are delineated.

Now, it should be the right time for the academic institutions and law practitioners to encourage the Lao regulating body responsible for countenancing the stocks trading in the country to look at and harvest successful experiences attained by other markets in the sub-region and beyond.

BIBLIOGRAPHY

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Cases

A v Authorité des marchés financiers (AMF) (C-302/20)

Arch Financial Products LLP and others v FSA [2012] FS/2012/20

Bradly v JP Morgan [2021] (No. 1) WL 066 92 661 (2021)

Conor Foley v Financial Conduct Authority [2020] WL 03659121 (2020)

FCA v Papadimitrakopoulos, Dimitris Gryparis [2022] EWHC 3048 (Ch)., 2022 WL 18635229

Geltl v Daimler AG (C-19/11), (2012) 3 C.M.L.R.32(2012)

Prodhan v FCA [2018] UKUT 0414

UK Legislation

Financial Services and Markets Act 2000

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The Treasury, 2018 No. 1403, Exiting the European Union Financial Services; The Markets in Financial Instruments (Amendments) (EU Exit) Regulations 2018

Finance Act 2022

EU Legislation

Directive 2003/6/EC of the European Parliament and the Council: on insider dealing and market manipulation

European Union, Directive 2014/57/EU of the European Parliament and the Council on criminal sanctions for market abuse (Market Abuse Directive)

European Union, Regulations, Regulation (EU) No 596/2014 of the European Parliament and of the Council, 16 April 2014

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Bainbridge M S, “An Overview of Insider Trading Law and Policy: An Introduction to the Insider Trading Research Handbook, UCLA/School of Law, Research Paper No. 12-15 (2012), http://ssm.com/abstract=2141457

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Shalchi A, Financial Services Act 2021 (House of Commons Library, Briefing Paper Number CBO 8705, 7 May 2021)

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[1] Alistair Hudson, The Law of Finance (2nd edition, Sweet & Maxwell 2013) 14-31.

[2] European Union, Regulations, Regulation (EU) No 596/2014 of the European Parliament and of the Council, 16 April 2014; The Treasury, 2018 No. 1403, Exiting the European Union Financial Services; The Markets in Financial Instruments (Amendments) (EU Exit) Regulations 2018, pt 4, cs 1, 2.

[3] ibid; Finance Act 2022, c 3, pt 3, ss 60-65.

[4] European Union, Regulations, Regulation (EU) No 596/2014 of the European Parliament and of the Council, 16 April 2014, art 7.1(a).

[5]  Timothy Edmonds, Market Abuse Directive/Regulation (House of Commons Library, Briefing Paper Number SN03217, 4 January 2016) 7-8.

[6] Alistair Hudson, Law of Derivatives (6th edition, Sweet & Maxwell 2018) 30-41, 49-56.

[7] Rϋdiger Veil, “Insider Dealing” in Rϋdiger Veil and Rebecca Schweiger, European Capital Markets Law (3rd edition, HART Publishing 2017) 197-210.

[8] Ibid.

[9] Edmonds (n 5) 3.

[10] The Treasury, 2019 No. 707, Exiting the European Union Financial Services and Markets, The Official Listing of Securities, Prospectus and Transparency (Amendment etc.,) (EU Exit) Regulations 2019, ss 5, 7, 23, 25.

[11] Ibid.

[12] Regulation (EU) No 596/2014 (n 4) art 7(1)-(4).

[13] Geltl v Daimler AG (C-19/11), (2012) 3 C.M.L.R.32(2012) [25], ibid (n 1) 352-353.

[14] Hudson (n 1) 353-354.

[15] Geltl v Daimler AG (C-19/11), (2012) 3 C.M.L.R.32(2012); A v Authorité des marchés financiers (AMF) (C-302/20), [2022] 1 W.L.R. 3036 (2022).

[16] Manning Gilbert Warren III, “The Regulation of Insider Trading in The European Community” [1991] Vol 48 Iss 3 Art 7, 1044 Washington and Lee Law Review, https://scholarlycommons.law.wlu. edu/wlulr.

[17] The Treasury, 2019 No. 310, Exiting the European Union Financial Services; The Market Abuse (Amendment) (EU Exit) Regulations 2019, pts 2, 5, 6.

[18] Ali Shalchi, “Financial Services Act 2021”, (House of Commons Library, Briefing Paper Number CBP 8705, 7 May 2021) 8-9.

[19] European Union, Directive 2014/57/EU of the European Parliament and of the Council on criminal sanctions for market abuse (Market Abuse Directive), arts 3, 6, 7.

[20] Regulation (EU) No 596/2014 (n 4), art 8(4).

[21] Regulation (EU) No 596/2014 (n 4), art 8(5).

[22]  Shalchi (n 18).

[23] Stephen M Bainbridge, “An Overview of Insider Trading Law and Policy: An Introduction to the Insider Trading “Research Handbook, UCLA/School of Law, Research Paper No. 12-15 (2012) 14-16, http://ssm.com/abstract=2141457.

[24] Regulation (EU) No 596/2014 (n 4), art 8(3).

[25] Regulation (EU) No 596/2014(n 4), art 8(2).

[26] Directive 2003/6/EC of the European Parliament and of the Council: on insider dealing and market manipulation, art 1(1).

[27] Ibid, art 6(2).

[28] [2012] (C-19/11) 3 C.M.L.R.32(2012) [72].

[29] Veil (n 7) 198.

[30] Directive 2003/6/EC (n 26) arts 1, 2, 3.

[31] Geltl (n 28) [72].

[32] Directive 2003/6/EC (n 26), art 1(1).

[33] Directive 2003/6/EC, art 1(2).

[34] Veil (n 7) 199-200.

[35] Geltl (n 28) [72]-[74].

[36] The World Bank, Self-regulation in Securities Markets (Policy Research Working Papers 5542) January 2011.

[37] Amendment 2019 No. 707 (n 10).

[38] Edmonds (n 5) 4-5.

[39] Financial Services and Markets Act 2000, ch 8.

[40] Financial Services Act 2021, ss 30-34.

[41] [2021] (No. 1) WL 066 92 661 (2021) [1] – [3].

[42] Bradly (n 41) [18].

[43] Bradly (n 41) [84].

[44] Bradly (n 41) [88].

[45] Bradly (n 41) [173] – [178].

[46] Bradly (n 41), Veil (n 29), Market Act 2000 (n 39).

[47] Edmonds (n 5) 9-10.

[48] FCA v Papadimitrakopoulos, Dimitris Gryparis [2022] EWHC 3048 (Ch)., 2022 WL 18635229.

[49] Ibid, [2].

[50] Ibid, [33].

[51] Amendment 2019 No. 707 (n 10).

[52] Edmonds (n 5) 9-10.

[53] [2020] WL 03659121 (2020) [1] – [4].

[54] Conor Foley (n 53) [2], [6].

[55] Markets Act 2020 (n 39), ss 56, 123(1).

[56] [2018] UKUT 0414,[20] -[26].

[57] [2012] FS/2012/20.

[58] Conor Foley (n 53) [49] – [51].

[59] Conor Foley (n 53) [49] – [51].

[60] Conor Foley (n 53) [11] – [14].

[61] Conor Foley (n 53) [11] – [14], [49] – [51].

[62] Stephen Valdez and Philip Molyneux, An Introduction to Global Financial Markets (8th edition, Bloomsbury Academic 2016) 179-182.

[63] FCA (n 48).

[64] Regulation (EU) No 596/2014 (n 4), art 7(1) a.

[65] Veil (n 7) 197-210.

[66] Geltl (n 28) [72], Bradly (n 41) [173] – [178], FCA (n 48), Conor Foley (n 53) [11] – [14], [49] – [51].

[67] Bradly (n 41), FCA (n 48).

[68] Directive 2003/6/EC (n 26).

[69] Geltl (n 28) [72].

[70] Services Act 2021 (n 40).

[71] Markets Act 2020 (n 39) c 8, s 21.

[72] Bradly (n 41) [1], [3], [4].