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2 MARKET ABUSE - INSIDE INFORMATION
2.1 CESR consultation on guidance on inside information
The Committee on European Securities Regulators ("CESR")
has published a consultation paper on a second guidance note
on the operation of the Market Abuse Directive ("MAD")
and what constitutes inside information. In the UK, the inside
information aspects of MAD have been implemented primarily
by the Disclosure and Transparency Rules ("DTR")
which are applicable to all companies whose shares are traded
on the Main Market.
Points to be drawn from the consultation which may provide
guidance in determining whether a disclosure needs to be made
under the DTR includes:
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What constitutes "Information of a
precise nature"; |
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What constitutes a "Significant Price
Effect"; and |
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Examples of legitimate delay in disclosure
of information. |
2.1.1 What constitutes "Information of a precise
nature"
If an issuer is in possession of "precise" inside
information then it must be disclosed. In determining whether
the information is precise, CESR suggests that there must
be a "reasonable expectation" that a set of circumstances
or an event has occurred, based on an objective analysis of
the situation (rather than market rumours or speculation in
respect of which issuers are under no obligation to respond).
If the information relates to a process which may take place
in separate stages then each stage could be information of
a precise nature (and, therefore, require disclosure), as
well as the process as a whole.
In addition, it is not necessary for a piece of information
to be comprehensive to be precise. By way of example, an approach
to a target company about a takeover could be precise enough
for disclosure even though certain specific terms (e.g. price)
have yet to be finalised. CESR considers that a piece of information
is specific enough to allow a conclusion to be drawn about
its impact on prices if it is such that it allows the reasonable
investor to make an investment decision without (or at very
low) risk and if the piece of information is such that it
is likely to be exploited immediately by the market.
2.1.2 What constitutes a "Significant Price Effect"
Those in possession of potential inside information should
assess whether or not the information is likely to have a
significant price effect. The mere possibility that the information
will have a significant effect is not sufficient to require
disclosure although, on the other hand, it is not necessary
that it is almost a certainty that it will in fact have that
effect. CESR does not consider it is possible or advisable
to quantify the meaning of "significant" in this
context (such as by reference to price thresholds or percentage
changes in prices) but rather, it suggests that the following
factors should be considered:
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anticipated magnitude of the matter or event
in question in the context of the company's activities; |
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the relevance of the information as regards
the main determinants of the price of the security; |
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the reliability of the source; and |
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all market variables that affect
the securities in question. |
The CESR consultation paper also includes a non-exhaustive
list of examples that may constitute inside information including
changes in management and supervisory boards, decisions to
increase or decrease share capital, significant legal disputes
and relevant changes in asset value.
2.1.3 Examples of Legitimate Delay in Disclosure of Information
In addition, the consultation paper provides a number of indicative
examples of guidance on the types of situations where it may
be legitimate to delay the disclosure of inside information
which include:
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Confidentiality constraints relating to
a competitive situation (e.g. a contract is being negotiated
and the disclosure of the negotiations would jeopardize
it being concluded); |
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Protection of product and/or intellectual
property developments provided that significant events
that impact on major product developments should be disclosed
(e.g. results of clinical trials in the case of new pharmaceutical
products); and |
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Impending developments that could be jeopardized
by premature disclosure. |
2.2 FSA's review of the controls over inside information
on mergers and acquisitions
The FSA, in consultation with the Panel on Takeovers and Mergers,
has been undertaking a review of the controls over the handling
of inside information on mergers and acquisitions - principally
public takeovers. The review is in response to a suggestion
made previously by the FSA that insider trading may have occurred
in about one-third of takeover announcements in 2004.
A comparison will be made between deals where there was a
leak of information and deals that did not have a leak of
information, based upon detailed discussions with all the
key parties and their advisers. Investigations are being made
to address the risk issues and enhance controls where necessary,
through a better understanding of systems and controls across
the industry (regulated and unregulated).
Detailed consideration is expected to be given to the use
of insider lists, Chinese walls, IT systems, security and
hard-copy filing systems. More general consideration will
be given to firms' training programs and compliance culture.
The findings are due to be published before the summer and
should include a summary of good practice examples of controls
and procedures and encourage firms to review their controls
and, where appropriate, take action to improve the systems
they have in place.
Click
here for the link to the CESR Consultation.
If you require further information on any matter covered in
this note, please contact your principal contact at Charles
Russell or Simon
Gilbert, Clive
Hopewell or Alexander
Keepin (London), Francis
Rundall, Richard
Norton, or Adrian
Mayer (Cheltenham), Catherine
Drew or Geoff
Sparks (Guildford) or Peter
Elliott (Oxford) on 0207 203 5000.
To download these articles in pdf format, please click
here.
Please note that the summaries above are
a general indicative guide only. They are not exhaustive.
This information has been prepared by the firm as a service
to our clients. As it is a general guide, we recommend that
you seek professional advice before taking action. No liability
can be accepted by the firm for any action taken or not taken
as a result of this information. The firm is not authorised
under the Financial Services and Markets Act 2000 but we are
able in certain circumstances to offer a limited range of
investment services to clients because we are members of the
Law Society. We can provide these investment services if they
are an incidental part of the professional services we have
been engaged to provide.
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