1. Legal Aspects of Finance
Slide Set 6
Market Abuse:
Insider Provisions: General Framework
Market (Price) Distortion
Own Shares and Securities Markets
Matti Rudanko

2. EU Regulation
on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (see next slide)
MAR: REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014
Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive)
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3. Accepted Market Practices
(Repealed) COMMISSION DIRECTIVE 2003/124/EC
of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards the definition and public disclosure of inside information and the definition of market manipulation
(Repealed) COMMISSION DIRECTIVE 2004/72/EC of 29 April 2004 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards
accepted market practices, the definition of inside information in relation to derivatives on commodities, the drawing up of lists of insiders, the notification of managers' transactions and the notification of suspicious transactions
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4. NASDAQ OMX Guidelines for Insiders
Finnish Regulation
SMA ch. 12
The Penal Code, ch. 51, sect
NASDAQ OMX Guidelines for Insiders
FSA Standard 5.3: Declarations of insider holdings and insider registers
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5. Inside Information: MAR
Inside information’ shall mean information of a precise nature
which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and
which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.
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6. Precise information
indicates a set of circumstances which exists or which may reasonably be expected to come into existence, or an event which has occurred or which may reasonably be expected to occur,
specific enough to enable a conclusion to be drawn as to the possible effect on the prices of the financial instruments
protracted process (e.g. merger) resulting in particular circumstances or a particular event:
both these and the intermediate steps of the process
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7. Precise information, cont.
Information (which, if it were made public, would be likely to have a significant effect on the prices of financial instruments)
= information a reasonable investor would be likely to use as part of the basis of his or her investment decisions
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8. Ban on Information Use: MAR
Target: who possesses that information:
by virtue of his membership of the administrative, management or supervisory bodies of the issuer; or
by virtue of his holding in the capital of the issuer; or
by virtue of his having access to the information through the exercise of his employment, profession or duties; or
by virtue of his criminal activities
Also anyone who possesses inside information while knowing, or having to know, that it is inside information
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9. Ban on Information Use, cont. (MAR) Acts prohibited:
Acquiring or disposing of, or trying to acquire or dispose of, for his own account or for the account of a third party, either directly or indirectly, financial instruments to which that information relates,
recommending or inducing another person, on the basis of inside information, to acquire or dispose of financial instruments to which that information relates.
The use of inside information by cancelling or amending an order concerning a financial instrument to which the information relates where the order was placed before the person concerned possessed the inside information, shall also be considered to be insider dealing.
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10. Ban on Disclosure (MAR)
Member States shall prohibit any person subject to the prohibition laid down in Article 2 from:
(a) disclosing inside information to any other person unless
such disclosure is made in the normal course of the exercise of his employment, profession or duties;
(b) recommending or inducing another person, on the basis of inside information, to acquire or dispose of financial instruments to which that information relates.
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11. Restrictions on Insider Ban
The provisions shall not restrict the right of a person to trade in securities if the acquisition or conveyance of securities is based on an agreement concluded before the person learned inside information on the security in question.
The ban applies to trading in securities subject to public trade, also to transactions outside a regulated market but
The provisions shall not restrict the right to acquire or convey a security subject to multilateral trading outside such trading procedure if the security has not been admitted to multilateral trading on the basis of the issuer’s application
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12. Abuse of Inside Information 3 The Penal Code, ch. 51, sect. 1
A person who in order to obtain financial benefit for himself or herself or someone else, intentionally or through gross negligence, takes advantage of insider information relating to a security that is traded in a regulated market
(1) by conveying or acquiring such a security on his or her own behalf or on behalf of someone else, or
(2) by providing direct or indirect advice to someone else acquiring or conveying such a security,
shall be sentenced for abuse of insider information to a fine or to imprisonment for at most two years.
An attempt of a intentional crime is punishable.
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13. Aggravated Abuse of Inside Information The Penal Code, ch. 51, sect. 1
If, in the abuse of insider information,
(1) particularly great profit or considerable personal benefit is sought,
(2) the offender commits the offence by abusing his or her particularly responsible position as an employee or representative of
a securities registry, settlement organisation, securities broker, securities exchange
the issuer of the security or a corporation belonging to the same group, or
on commission by one of the above, or
.(3) the offence is committed in a particularly methodical manner,
and the abuse of insider information is aggravated also when assessed as a whole,
the offender shall be sentenced for aggravated abuse of insider information to imprisonment for at least four months and at most four years. An attempt is punishable.
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14. Market price distortion 1 (MAR, Finnish Penal Code Ch. 51, Sect
Market price distortion 1 (MAR, Finnish Penal Code Ch. 51, Sect. 3 and 4)
A person who
in order to obtain financial benefit for himself or herself or for another
distorts the market price of securities that are traded in a regulated market or traded in Finland in multilateral trade,
shall be sentenced for market price distortion to a fine or to imprisonment for at most two years.
This shall also apply to a transaction or other action involving a security other than one referred to above, if this distorts the securities market referred to above.
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15. Market price distortion means e.g.
1) a misleading offer to purchase or sell, a fictitious transaction and another deceptive action relating to a security;
2) business transactions or other actions which give false or misleading information on the supply of, demand for and price of a security;
3) transactions or other actions by which a person or persons acting in collaboration secure, the price of securities at an abnormal or artificial level; or
4) publishing or other dissemination of false or misleading information on a security, where the person who published or disseminated the information knew, or should have known, that the information was false or misleading.
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16. Accepted market practices - exemptions from points 2 and 3
Established by the competent authority on these criteria:
the market practice provides for a substantial level of transparency to the market;
ensures a high degree of safeguards to the operation of market forces and the proper interplay of the forces of supply and demand;
a positive impact on market liquidity and efficiency;
trading mechanism of the relevant market: enables market participants to react properly and in a timely manner to the new market situation;
Etc.
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17. Disclosure or dissemination of information in the media
disclosure or dissemination of information assessed taking into account the rules governing the freedom of the press and freedom of expression in other media and the rules or codes governing the journalist profession, unless:
the persons concerned derive an advantage or profits from the disclosure or the dissemination of the information, or
the disclosure or the dissemination is made with the intention of misleading the market as to the supply of, demand for, or price of financial instruments.
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18. Market price distortion and insider dealing: exemptions
Buy-back programmes and stabilization where
the full details of the programme are disclosed prior to the start of trading and trades are reported as being part of the buy-back programme to the competent authority and disclosed to the public;
adequate limits with regard to price and volume are complied with;
the sole purpose is to reduce the capital of an issuer or to meet obligations arising from exchangeable debt financial instruments or obligations arising from option based or other allocations of shares to employees or to management.
Monetary and public debt management activities and climate policy activities (public actors)
The acquisition or disposal of financial instruments to which that information relates is made legitimately in the normal course of the exercise of the function as a market maker or as a counterparty for that financial instrument.
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19. Managers’ transactions
Persons discharging managerial responsibilities, as well as persons closely associated with them, shall notify the issuer or the emission allowance market participant and the competent authority:
in respect of issuers, of every transaction conducted on their own account relating to the shares or debt instruments of that issuer or to derivatives or other financial instruments linked thereto;
in respect of emission allowance market participants, of every transaction conducted on their own account relating to emission allowances, to auction products based thereon or to derivatives relating thereto.
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20. Public Disclosure of Insider Information; Insider Lists (MAR)
An issuer shall inform the public as soon as possible of inside information which directly concerns that issuer.
Issuers or any person acting on their behalf or on their account, shall:
draw up a list of all persons who have access to inside information and who are working for them under a contract of employment, or otherwise performing tasks through which they have access to inside information, such as advisers, accountants or credit rating agencies (insider list);
provide the insider list to the competent authority as soon as possible upon its request.
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21. Recommended Restriction on Trading: STOCK EXCHANGE Guidelines for Insiders 6.1
In practice it is recommended that the permanent insiders acquire securities issued by the company as long-term investments.
It is also recommended to schedule the trading of these securities as far as possible to the moment, when the markets have as exact information as possible of the issues influencing the value of the security (e.g. after the publication of earnings information).
The closed window ends at the time the interim report or financial statement bulletin is published unless the company has specified a longer period of trading restriction.
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22. Own Shares and Insider Trading / Stock Exchange Guideline
The company gives a binding commission when it is not in possession of insider information as defined in Chapter 5, Section 1 of the Securities Markets Act.
It is not recommended that the commission is given during the 14 day period immediately preceding making public of the financial statement bulletin or the interim report nor during such longer period of time that the company has prescribed for the insiders of the company.
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23. Own Shares and the Market / Stock Exchange Guideline
A listed company may acquire at the most a 10-percent share of its own shares and thus the company may momentarily be a significant operator in the markets.
The acquisition of own shares shall be effected so that no exceptional market movements result from the trading of the company
and the equal treatment of the shareholders is taken into consideration in the acquisition as a whole.
Cf. market manipulation regulation
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24. Transactions in Own Shares
Commission Regulation (EC) No 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council (Market Abuse Directive) as regards exemptions for by-back programmes and stabilization of financial instruments (Commission Buy-back Regulation)
Rule of the Stock Exchange Ch. 5.3
Guidelines of the Stock Exchange on the Own Shares of a Listed Company
FSA Standard 1.3 ( ; not yet in English; ”The Reliable Administration and Arrangement of Business Activities”)
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25. COMMISSION REGULATION (EC) No 2273/2003 of 22 December 2003
Safe Harbours
implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilisation of financial instruments
COMMISSION REGULATION (EC) No 2273/2003 of 22 December 2003
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26. Safe Harbours, cont. MAR: REGULATION (EU) No 596/2014 art. 5)
The prohibitions provided for in this Directive shall not apply to trading in own shares in ‘buy-back’ programmes or to the stabilisation of a financial instrument provided such trading is carried out in accordance with implementing measures adopted in accordance with the procedure laid down in Article 17(2).
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27. Safe Harbours, cont. COMMISSION REGULATION (EC) No 2273/2003
In order to benefit from the exemption provided for in Article 8 of Directive 2003/6/EC, stabilisation of a financial instrument must be carried out in accordance with Articles 8, 9 and 10 of this Regulation.
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28. Safe Harbours, cont. COMMISSION REGULATION (EC) No 2273/2003
The issuer must not, when executing trades under a ‘buy-back’ programme, purchase shares at a price higher than the higher of the price of the last independent trade and the highest current independent bid on the trading venues where the purchase is carried out
The issuer must not purchase more than 25 % of the average daily volume of the shares in any one day on the regulated market on which the purchase is carried out
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29. Safe Harbours, cont. COMMISSION REGULATION (EC) No 2273/2003
In order to benefit from the exemption provided by Article 8 of Directive 2003/6/EC, the issuer shall not, during its participation in a buy-back programme, engage in the following trading:
(a) selling of own shares during the life of the programme;
(b) trading during a period which, under the law of the Member State in which trading takes place, is a closed period
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30. Safe Harbours, cont. COMMISSION REGULATION (EC) No 2273/2003
Paragraph 1 shall not apply if the issuer is an investment firm or credit institution and has established effective information barriers (Chinese Walls) subject to supervision by the competent authority,
between those responsible for the handling of inside information related directly or indirectly to the issuer and those responsible for any decision relating to the trading of own shares (including the trading of own shares on behalf of clients), when trading in own shares on the basis of such any decision.
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