Market abuse: Bite your tongue!

Last month, the Financial Conduct Authority (FCA) – the market abuse watchdog in the United Kingdom – imposed an £80,000 fine on the ex-chairman of a London Stock Exchange-listed company, for unlawfully disclosing inside information.[1] The fine was imposed after the FCA found that the chairman had disclosed inside information about the company to two major shareholders (one of which was known as having an active intention to build a more significant shareholding in the company) before the information was announced to the market.The rule which the chairman breached is simple enough to read – inside information cannot be disclosed “unlawfully”. In other words, the chairman was found to have disclosed inside information outside the ‘lawful’ disclosure framework established by MAR which, in a nutshell, only allows inside information to be disclosed: (i) in the course of one’s employment, profession or duties, (ii) publicly by means of a company announcement, or (iii) in the course of a market sounding.Keeping in mind that the market abuse rules in the United Kingdom are the same as those in Malta (even after Brexit), a number of important lessons and observations are in order.

1. “Considerable experience and position”. In its decision, the FCA found that chairman ought to have known that the information he disclosed constituted, or may have constituted, inside information, and that the disclosure was not made in the normal exercise of his employment, profession or duties. The FCA reached this conclusion after considering a number of factors, including the chairman’s “considerable experience and position”, as well as the fact that he had previously received training on the Market Abuse Regulation (MAR). In other words, the chairman’s seniority lead the FCA to hold the chairman to a higher degree of accountability than the average employee. While this observation should not be interpreted to mean that less senior employees are free to do whatever they want with any inside information that they possess, it should serve to remind more senior and experienced members of staff to thread with even greater caution.

2. “Failed to apply his mind”. The FCA’s main finding was that the chairman acted negligently in disclosing the information, but also that he “failed properly to apply his mind to the specific question of what information, if any, he might properly disclose, as well as when, in what manner and to whom”. The force with which the FCA treated this failure highlights the importance of being able to justify any action ex post facto, the success of which justification will depend on the comprehensiveness of records that are kept. It is therefore advisable to develop and implement sound record keeping practices where any key decisions, even if unilateral, as well as their underlying rationales, are properly recorded for posterity – keeping in mind that an investigation such as the one under review will revolve heavily on documentary evidence.

3. “Failed to obtain clear, formal advice”. The FCA also cited the chairman’s failure “to obtain clear, formal advice” as one of the factors which contributed to his negligence in unlawfully disclosing inside information. While this observation ties in with the importance of always being in a position to justify one’s actions and decisions, it separately highlights the importance of keeping an open dialogue with legal advisors, or compliance officers, who may be able to look at issues from afar and offer objective advice on matters which may not be as straightforward as they seem to be on paper.

4. “Should have realised that the information he disclosed amounted, or may have amounted, to inside information”. Interestingly, at the time of the (unlawful) disclosure of the information, the company had not yet formally classified the information as ‘inside information’ in terms of MAR since it was expecting some clarifications before being in a position to publicly disclose the information. Yet, the FCA still found that the chairman “should have realised that the information he disclosed constituted, or may have constituted, inside information”. The FCA therefore made it clear that even though the information was not yet in a state to be announced to the market, that did not prevent it from being ‘inside information’, the test for which is set out in article 7 of MAR and does not include whether the information is currently suitable for announcement.

5. Robust policies and procedures. On a final note, it is worth noting that the incident in question took place notwithstanding that the company had a Market Disclosure Policy which set out various procedures that applied when dealing with inside information. While it is beyond the scope of this article to comment on the effectiveness of the company’s policy (not least since the policy is not publicly available), suffice it to say that even the best policies in the world cannot prevent any unlawful behaviour. While well drafted policies are, and will always be, of central importance, it is equally important to ensure that (a) policies are regulatory reviewed and updated, and (b) every employee and board member is well acquainted with these policies. In this connection, the European Securities and Markets Authority has observed that “issuers that do not have in place effective arrangements, systems, procedures or other types of controls for the identification, handling and disclosure of inside information are highly likely to breach their obligation to disclose inside information as soon as possible” (MAR Review Report, September 2020).

Even though MAR “is not intended to prohibit discussions of a general nature regarding the business and market developments between shareholders and management concerning an issuer” (recital 19 MAR), it is clear – not least from the hefty punishment imposed on the chairman in question – that selective disclosures of inside information are not looked at favorably, unless such disclosures are made in compliance with MAR. For this reason, and in view of enhanced regulatory focus on market abuse in recent months, our advice would be to heed the age old advice that “the less said, the better!”The author would like to thank Ms Maegan Grech for her assistance in drafting this article.________________________________________________________________________[1] https://www.fca.org.uk/publication/final-notices/sir-christopher-gent-2022.pdf