WELCOME TO CHARLES RUSSELL SPEECHLYS.
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In 2011, the European Commission began its update of the existing market abuse regime by publishing legislative proposals to replace the existing Market Abuse Directive (2003/6/EC) (MAD) with a Regulation on insider dealing and market manipulation (MAR) along with a Directive on criminal sanctions for insider dealing and market manipulation (CSMAD), such proposals being collectively known as MAD II (MAD 2).
It is proposed that MAR will replace MAD and will expand the existing EU market abuse framework, reducing regulatory complexity and increasing legal certainty.
For example, the Commission has stated that it believes current sanctions are “lacking in impact and are insufficiently dissuasive” as well as identifying that even the definition of market abuse varies across a number of member states, leading to the creation and exploitation of potential loopholes.
CSMAD complements MAR with the introduction of minimum rules on criminal offences and criminal sanctions for market abuse, marking a significant change from the existing framework. Currently, member states are required to impose administrative sanctions but are free to determine whether to impose criminal sanctions for market abuse offences or not.
For the first time criminal sanctions will apply to serious market abuse offences at the EU level.
The European Parliament adopted CSMAD on first reading on 4 February 2013 and the MAD 2 legislative package was adopted by the Council of the EU on 14 April 2014 with the official final text of CSMAD expected to be published later this year.
It will come into force following its publication in the Official Journal and member states will then have two years to implement the directive into national law.
The scope of CSMAD is limited in line with MAR, in that certain transactions, orders or behaviours are excluded. For example, buy-backs and stabilisation programmes, debt management activities and monetary policies, and activities relating to emission allowances in connection with EU climate policy.
The proposed CSMAD sets out two market abuse offences that are to be regarded as criminal offences if committed intentionally - insider dealing and market manipulation.
The offence of insider dealing will be committed when a person who is in possession of inside information intentionally:
The offence of market manipulation will be committed when a person intentionally:
The CSMAD also requires member states to take the necessary steps to ensure that inciting, aiding and abetting market abuse are punishable as a criminal offence.
The CSMAD sets out minimum penalties for market abuse offences committed by natural persons and penalties that may apply to legal persons. Member states are required to ensure that market abuse offences are to be punishable by criminal sanctions which are “effective, proportionate and dissuasive”.
In relation to natural persons, member states shall take those measures necessary to ensure the following shall apply:
A legal person (eg LLPs or companies) can be liable for offences committed for its benefit by any person with a leading position within the entity based on certain criteria, whether the leading person acts on an individual basis or as part of the legal person.
Furthermore the liability of legal persons shall not exclude criminal proceedings against natural persons who are involved as “perpetrators, inciters or accessories” in any market abuse offence.
A range of sanctions, in addition to criminal or civil fines, may be imposed on an entity as a result of a market abuse offence, including for example:
It has been noted that CSMAD should not create obligations as to how penalties are applied in individual cases but when considering applicable sanctions, member states should consider additional factors such as the functioning of markets or the wider economy, as well as the profits made (or losses avoided) by the liable persons as well as any resulting damage caused to others.
The UK has currently decided not to opt into the proposed CSMAD but has announced its intention to fully participate in EU negotiations in the hope that it may be able to opt in at a later date.
The Government has stated that its decision not to opt in is based on the general timing of the Commission’s proposal rather than the substance of CSMAD, arguing that it is difficult to assess the impact and scope of CSMAD as it is entirely dependent upon the outcome of the proposed MAR and proposed revisions to MiFID (Markets in Financial Instruments Directive).
Furthermore, market abuse offences, including market abuse that is committed recklessly, are covered by existing UK law. The Government does recognise that CSMAD appears to offer sufficient flexibility to allow member states to go further than minimum specified standards and that this would be beneficial to UK interests and the existing domestic regime.
It is intended that MAR and CSMAD be debated in Parliament given the Government’s plan to opt into CSMAD in the future.
For more information please contact Mark Howard on +44 (0)20 7203 8902 or at email@example.com