Changes to the Market Abuse Regulation (MAR) are coming into effect on 1 January 2021. These changes are a result of the Regulation on SME Growth Markets (the Regulation), which came into force on 31 December 2019. The primary aim of the Regulation is to reduce the administrative burdens and compliance costs faced by issuers on SME Growth Markets (such as Euronext Growth or AIM). For a reminder of the key features of the Regulation, see our 2019 article.
Some of the amendments are aimed solely at issuers trading on SME Growth Markets. However, the Regulation also introduces a small number of amendments to the MAR regime as it applies to all market participants. While the changes are to be welcomed in so far as they lighten the compliance burden for SME companies, they are relatively modest in effect.
Changes to MAR for issuers on SME Growth Markets
1. Insider lists: reduced disclosure
Issuers admitted to trading on SME Growth Markets will no longer be exempted from the requirement to produce insider lists. The exemption will be replaced by a reduced disclosure requirement for issuers to include in their lists “only those persons who, due to the nature of their function or position within the issuer, have regular access to inside information”.
Disclosure for SME Growth Market issuers is therefore limited to what are known as 'permanent insiders', such as directors and in-house counsel, and does not include persons such as advisers or accountants. A Member State may also decide to extend the wider insider list obligation to SME Growth Market issuers, if it considers that this is justified by specific national market integrity issues.
ESMA was tasked with developing draft implementing technical standards (ITS) to replace the existing ITS on insider lists (Implementing Regulation 2016/347) and to determine the precise format of these reduced disclosure insider lists. It submitted draft ITS to the European Commission by way of Final Report at the end of October 2020 and these are expected to be introduced by way of implementing regulation in 2021.
Despite calls for a reduction in the number of fields required to be completed (such as ‘birth surname’, ‘company name and address’ and ‘personal full home address’) on account of the undue administrative burden their inclusion presents, no changes to the required fields have been put forward by ESMA in the new ITS.
2. Disclosure delays
Issuers whose securities are admitted to trading only on an SME Growth Market will no longer be required to report reasons for delaying public disclosure of inside information unless requested to do so by the Central Bank of Ireland (CBI). As long as the issuer is able to justify its decision to delay, the issuer will not be required to keep a record of that explanation. However, we believe that the possibility of a CBI request will mean that any change in internal practice is likely to be minimal.
3. Liquidity contracts
Issuers whose financial instruments are admitted to trading on an SME Growth Market will be authorised to enter into a liquidity contract for their shares provided that certain standard conditions are met. A liquidity contract is entered into between an issuer and investment firm and is endowed with shares and/or cash by the issuer, which can then be used, within pre-agreed parameters, to provide liquidity in the issuer’s share trading.
Liquidity contracts are not a feature of the UK or Irish markets, but are widely used in France, Spain, Portugal and Italy, where there are established market practices dealing with them and exempting them from the general prohibition on market manipulation.
ESMA was tasked with devising draft regulatory technical standards (RTS) to determine the format of the liquidity contracts for SME Growth Markets. It submitted draft RTS to the European Commission by way of Final Report at the end of October 2020 and these are expected to be introduced by way of delegated regulation in 2021.
Liquidity contracts may well enhance liquidity for certain issuers, depending on the willingness of investment firms to enter into them, but given the need for the issuer to invest either cash or shares in support of the contract, it seems likely that any benefits will be skewed towards larger SME companies. The requirement for separate, market-specific liquidity contracts where an issuer’s securities are quoted on more than one market may also complicate adoption by Irish issuers, many of whom have securities quoted on both Euronext Growth and AIM.
Changes to MAR for market participants including main market issuers
1. Managers’ transactions
Issuers will have two business days following receipt of a notification to make public the details of a manager’s transaction after receiving notification from a person discharging managerial responsibility (PDMR) or a person closely associated (PCA). This will replace the current timeline of three business days after the transaction has been carried out, which proved very difficult, and in some cases impossible, for a company to meet given that it coincided with the deadline for the PDMR or PCA to make the notification to the issuer.
2. Qualified investors: market soundings
Disclosure of inside information to 'qualified investors' (as defined in MiFID II) for the purposes of “negotiating the contractual terms and conditions of their participation” in the course of a private placement of bonds will be permitted provided that an adequate non-disclosure agreement is in place.
Such communications will be deemed to be made in the normal exercise of a person’s employment, profession or duties and therefore will not constitute unlawful disclosure of inside information. Effectively, this change will avoid the need for a formal market soundings exercise to be conducted in order for the relevant disclosure to benefit from a safe harbour from unlawful disclosure.
At the end of the transition period (31 December 2020), MAR as it is in force at that time will form part of retained EU law in the UK and will continue to apply (with some changes to ensure that it operates effectively once the UK has left the EU).
However, as these amendments to MAR only take effect after the end of the transition period, they will not automatically apply to issuers on UK SME Growth Markets (such as AIM and AQSE Growth Market).
The UK is currently only proposing to make some of the amendments (through the Financial Services Bill 2019-21, which is still going through Parliament) and so there will likely be some divergence in practice between the UK and the EU.
Of the amendments discussed in this article, the UK will be implementing only the increase in time period for PDMR transactions. UK issuers, therefore, will not be able to rely on the new market soundings safe harbour for qualified investors and AIM issuers will not benefit from the lighter touch insider list requirements.
We will closely monitor developments in this area, particularly divergences between EU and UK law in this space.