Part A Annotated Guide, 1 History, Application, Interpretation, and Legal Sources of the Market Abuse Regulation
Edited By: Marco Ventoruzzo, Sebastian Mock
- Market abuse — Market Abuse Directive (MAD) — Regulated activities
A.1.01 The Market Abuse Regulation is a European Community legal instrument under the EC Treaty. As a Community regulation, it has general application, and is binding in its entirety and directly applicable in all Member States (Article 288 TFEU). General application means that the Market Abuse Regulation applies to objectively determined situations and produces legal effects on categories of persons envisaged in the abstract.1 Binding in their entirety means that all (p. 4) provisions of the Market Abuse Regulation apply in identical terms throughout the Community. Finally, directly applicable means that the Market Abuse Regulation has direct effect in all Member States and does not have to be transposed into national law. However, clearly the accompanying directives must be transposed into national law.
A.1.02 The Market Abuse Regulation is based on the competence of the Union in Article 114 of the Treaty on the Functioning of the European Union (TFEU). The choice for a regulation instead of a directive is based on the idea that a regulation is the most appropriate legal instrument to define the market abuse network in the Union.2 This assessment of the Commission is based mainly on the experiences with the (former) Market Abuse Directive (2003/6/EC), which failed to create a truly level playing field with regard to market abuse.3 The Market Abuse Regulation also meets the requirements set out under the principle of subsidiarity and of proportionality (Article 5(3) TEU). In particular, the previous experiences in connection with the harmonization of national capital markets law created by the (former) Market Abuse Directive (2003/6/EC) made it obvious that the practice of regulatory arbitrage still remained in the Common Market.
The Segré Report of 1966
A.1.04 The initial ideas for regulating the European capital markets were proposed in the Segré Report of 1966,5 which was in fact merely an analysis of the situation in the European capital markets at that time. In this regard, the Segré Report pointed out a number of weaknesses in the securities markets in Europe and made several political recommendations. However, the regulation of market abuse and its underlying principles were not addressed in the report.
A.1.05 The first regulation of market abuse in the European Union was the (original) Stock Exchange Listing Directive (79/279/EEC), which introduced in Article 17 the obligation to disclose important single events, which were defined in Schedules C and D of that directive. Although this obligation might be considered as a forerunner of the obligation to disclose inside information as set out in Article 17 of the Market Abuse Regulation, this obligation was extremely limited and did not cover all aspects of (inside) information.
The Insider Dealing Directive (1989/592/EEC)
A.1.06 The next major step was the Insider Dealing Directive (1989/592/EEC) of 1989.6 However, in contrast to the Market Abuse Regulation the Insider Dealing Directive (1989/592/EEC) focused only on the definition and prohibition of insider dealing. This limitation to the prohibition of insider dealing alone therefore failed to seize the opportunity of creating a strict liability obligation to disclose inside information and to prohibit market manipulation. This was as a result of the fact that, in the 1960s, there was no regulation of insider trading at all in the capital markets laws of most of the Member States. Therefore, the limited approach of the Insider Dealing Directive (1989/592/EEC) was clearly nothing more than the most basic form of legislation concerning European capital markets law. However, it should be pointed out that the structure and some of the basic concepts included in the Market Abuse Regulation were in fact addressed by the Insider Dealing Directive (1989/592/EEC), particularly with regard to the definition of inside information (Article 1),7 the transactions and the behaviour covered by the prohibition (Article 2),8 and the exemptions regarding monetary and public debt management activities (Article 4).9
The (new) Stock Exchange Listing Directive II (2001/34/EC)
A.1.07 A brief episode in the regulation of market abuse was the (subsequent) Stock Exchange Listing Directive II (2001/34/EC) of 2001, whereby listed companies issuing new shares and undertakings issuing debt securities were obliged to inform the public with immediate effect of any major new developments in their business activities or changes regarding their share capital that were not information that was within the public domain and which might, by virtue of their (p. 6) effect on the assets and liabilities or financial position or in the general course of business, lead to substantial movements in the market prices of their shares (Articles 68(1) and 81(1) of the (new) Stock Exchange Listing Directive II (2001/34/EC)). This obligation was supported by a number of additional disclosure requirements. However, the prohibition of insider dealing and market manipulation was entirely unaffected by the (new) Stock Exchange Listing Directive II (2001/34/EC).
The (former) Market Abuse Directive (2003/6/EC)
A.1.08 The first major piece of legislation addressing not only insider dealing but also certain other aspects of market abuse was the (former) Market Abuse Directive (2003/6/EC), which addressed the same aspects as the Market Abuse Regulation.10 Although recital (12) of the (former) Market Abuse Directive (2003/6/EC) defined market abuse only as insider dealing and market manipulation, the (former) Market Abuse Directive (2003/6/EC) not only covered these two forms of market abuse in its Articles 2 and 5 but also required the issuers of financial instruments to inform the public as soon as possible of inside information that directly concerned the issuer (Article 6 (former) Market Abuse Directive (2003/6/EC)). In comparison with earlier directives, the (former) Market Abuse Directive (2003/6/EC) provided a very comprehensive framework for the regulation of market abuse. However, since the (former) Market Abuse Directive (2003/6/EC) had to be transposed into national law by each of the Member States, huge differences regarding the application of the law on market abuse was thereby created in the Member States and which remained in place. These differences had a correspondingly large negative impact in terms of market integrity and investor protection and led to anything but a level playing field.11 Despite this, at the time the (former) Market Abuse Directive (2003/6/EC) was considered as a general success, owing to the fact that it introduced a comprehensive market abuse regime in all Member States and, particularly, in those Member States which had until then pursued a more reluctant approach.
A.1.09 These factors, namely the lack of uniformity, several new developments regarding insider trading and market manipulation, the limited scope of application and the financial crises of 2007/2008 led, in the later 2000s, to a discussion regarding the reform of the (former) Market Abuse Directive (2003/6/EC). This led, in turn, to the enactment of the Market Abuse Regulation.12 The deployment of a regulation rather than a directive was one of the major features of this reform, because harmonization under the (former) Market Abuse Directive (2003/6/EC) could not provide the legal framework necessary to create the Capital Markets Union. However, it is questionable whether the mere transformation of the (former) Market Abuse Directive (2003/6/EC) into the Market Abuse Regulation can truly provide such a framework. This is the case because the application of the Market Abuse Regulation is basically in the domain of the competent national authorities and the European Securities Market Authority (ESMA), neither of which has the power directly to refer cases to the Court of Justice of the European Union (CJEU) for a preliminary ruling. Only the national courts of the Member States have that right under Article 267 of the TFEU. Since market participants are often extremely reluctant to challenge actions taken by the competent national authorities, such preliminary rulings dealing with the Market Abuse Regulation will probably be as rare as they were under the (former) Market Abuse Directive (2003/6/EC). Consequently, the application of the Market Abuse Regulation will principally be influenced by the administrative practices of the competent national authorities and the ESMA and will not be subject to the control of the CJEU.
A.1.10 As a European regulation, the Market Abuse Regulation must be directly applicable, and subject to the interpretation by the CJEU in the last instance. In this regard, autonomous interpretation is the core principle for the interpretation of the Market Abuse Regulation.13 However, the interpretation of the Market Abuse Regulation, as is true of all EU legislation, faces the problem of so-called divided interpretation.14
(p. 8) Autonomous interpretation as the core principle for the interpretation of the Market Abuse Regulation
A.1.11 The interpretation of the Market Abuse Regulation is first of all driven by the fact that the European legislator wanted to increase market integrity and investor protection, whilst simultaneously ensuring a single rule book and a level playing field, thereby increasing the attractiveness of securities markets for raising capital.15 This underlines the general principle of an autonomous interpretation of European law, which means in the context of the Market Abuse Regulation that all of its provisions must be interpreted autonomously and without reference to national capital markets or corporate law. In addition, the former practices of the competent national authorities in the application of national law implementing the (former) Market Abuse Directive (2003/6/EC) are no longer relevant or applicable, unless they can be seen to comply with (autonomous) interpretation of the Market Abuse Regulation. However, the case law of the CJEU regarding the (former) Market Abuse Directive (2003/6/EC) remains relevant for the interpretation of the Market Abuse Regulation, owing to the fact that it is partially based on this case law, especially regarding the requirement for the disclosure of inside information, as set out in Article 7.16 Another unresolved question regarding the interpretation of the Market Abuse Regulation is its application in the context of civil matters, largely because it does not address civil law issues at all.17
The problem of ‘divided’ interpretation
A.1.12 The Market Abuse Regulation establishes a common regulatory framework on market abuse. As is the case for any form of regulation in capital markets law, it touches not only aspects of administrative (capital markets) law dealing with the competences of a supervisory authority but also aspects of criminal law and—even though not explicitly dealt with18—of civil law and especially of civil liability for violations of the prohibitions it sets out. This broad approach of the Market Abuse Regulation, however, has led to the problem that standards for the interpretation of the Market Abuse Regulation are different for each area of law. This is especially the case for criminal law, where a rather strict interpretation of the law must usually be applied. Additionally, in the administrative law of (some) Member States a different but also strict interpretation must be applied to meet constitutional or other restrictions for administrative authorities. Finally, in civil law in the context of capital markets law very often specific standards of proof are applied to protect investors who have suffered losses, which also has an indirect (p. 9) influence on the interpretation of the Market Abuse Regulation as the underlying regulation.19 The consequences of these three different standards for the interpretation of the Market Abuse Regulation (so-called divided interpretation) remain an unresolved problem.
Market Abuse Regulation
A.1.13 The first and most important piece of legislation of the (new) market abuse regime is the Market Abuse Regulation itself, which entered into force on 2 July 2014 (Article 39(1) Market Abuse Regulation). However, large parts of the Market Abuse Regulation only came into effect on 3 July 2016 (Article 39(2) Market Abuse Regulation). The Market Abuse Regulation replaces the (former) Market Abuse Directive (2003/6/EC).20
Market Abuse Directive on Criminal Sanctions (2014/57/EU)
A.1.14 Although the European legislator enacted the market abuse regime as a regulation rather than as a directive, several aspects of this new regime are not covered by the regulation but are instead governed by the Market Abuse Directive on Criminal Sanctions (2014/57/EU). It should be borne in mind that the European legislator avoided including certain aspects in the Market Abuse Regulation and decided to implement them in a directive on criminal sanctions, although this approach has often been considered to be insufficient for the (general aspects of the) market abuse regime. This somewhat reluctant and negative approach is attributable to the fact that the European legislator has only a very limited ability to adopt rules on criminal law. Pursuant to Article 83(2) of the TFEU, the European legislator can only adopt minimum rules in criminal matters, and only when such rules are essential to ensure the effective implementation of EU policy.
A.1.15 The Market Abuse Directive on Criminal Sanctions (2014/57/EU) sets out the general framework for criminal sanctions for violations of the prohibitions of the Market Abuse Regulation.21 In this regard, the Market Abuse Directive on Criminal Sanctions (2014/57/EU) requires Member States to ensure that insider dealing, recommending or inducing another person to engage in insider dealing, the unlawful disclosure of inside information, and market manipulation (p. 10) constitute criminal offences in all cases when committed intentionally (Articles 3, 4, and 5 of the Market Abuse Directive on Criminal Sanctions (2014/57/EU)). Moreover, inciting, aiding, and abetting of these offences is punishable as a criminal offence (Article 6 Market Abuse Directive on Criminal Sanctions (2014/57/EU)). In addition to these definitions for criminal offences, the Market Abuse Directive on Criminal Sanctions (2014/57/EU) also sets out a general framework for the respective penalties (Article 7) and establishes liability for legal persons (Articles 8 and 9). Finally, Article 10 sets out the jurisdictions for these offences since they affect the capital markets of several Member States.
Level 2—Rules adopted by the Commission
A.1.16 Furthermore, in Article 35 of the Market Abuse Regulation the power to adopt delegated acts is granted to the Commission. These so-called Level 2 Legislative Acts usually deal with specific technical aspects. To date, the Commission has adopted nine delegated acts and one implementing act.22
Level 3—Guidelines and recommendations
A.1.17 Finally, the European Securities Market Authority (ESMA) can issue so-called Level 3 guidelines and recommendations. These guidelines and recommendations are intended to support the competent national authorities and market participants in the application of the Market Abuse Directive. Although these guidelines and recommendations are non-binding, Article 16(3) of the ESMA Regulation (1095/2010/EU) states that the competent national authorities and market participants must use their best endeavours to comply with them.23
A.1.18 A complex problem of the Market Abuse Regulation is whether it governs market abuse in the Member States exclusively. Under the (former) Market Abuse Directive (2003/6/EC), most Member States did not consider the directive as a maximum harmonization measure, and one therefore giving them the opportunity to expand its scope of application or to create additional rules for market abuse outside its scope. Although it is a directly applicable European regulation, this problem also occurs in the context of the Market Abuse Regulation. This is (p. 11) especially relevant regarding the detailed scope of application set out by Article 2 of the Market Abuse Regulation, owing to the fact that some Member States would prefer that the regulation were to have a broader scope of application and rules prohibiting market abuse than it actually does. As for the (former) Market Abuse Directive, under the new market abuse regime contained in the Market Abuse Regulation, it is necessary to distinguish in this context those aspects covered by the scope of application of Article 2 of the Market Abuse Regulation and those outside its scope. The rules set out by the Market Abuse Regulation within its scope of application (Article 2 of the Market Abuse Regulation) must be considered as exclusive. Therefore, Member States have no competence to create additional rules on market abuse regarding financial instruments already traded on markets covered by Article 2 of the Market Abuse Regulation. This is because Article 1 of the Market Abuse Regulation explicitly states that the Market Abuse Regulation establishes a common regulatory framework on market abuse. The ability of the Member States to create additional rules within the scope of application of the Market Abuse Regulation would undermine in particular the confidence of investors in those markets, since they would be faced with competing rules. Moreover, it should be borne in mind that the lack of uniformity in the market abuse regime under the (former) Market Abuse Directive (2003/6/EC) was the major reason for the European legislator to replace the directive with the Market Abuse Regulation. However, Member States are not limited in their ability to expand the scope of application of the Market Abuse Regulation to financial instruments or markets currently outside the scope of application covered by Article 2 of the Market Abuse Regulation. In this regard, Member States can choose between referring simply to the Market Abuse Regulation in national law or to create their own national laws for market abuse. If a Member State makes a reference to the Market Abuse Regulation that is outside its scope of application, the interpretation of these rules—including those referred to in the Market Abuse Regulation—is a matter of national law alone. Consequently, national courts of Member States cannot directly refer a case involving the interpretation of such a provision to the CJEU for a preliminary ruling under Article 267 of the TFEU.(p. 12)
6 See eg Paul L Davies, ‘The European Community’s Directive on Insider Dealing: From Company Law to Securities Markets Regulation?’ (1991) 11 Oxford Journal of Legal Studies 92, 101 ff; Klaus J Hopt, ‘The European Insider Dealing Directive’ (1990) 27 Common Market Law Review 51; see Moloney (n 4) 707 ff.
7 See Part B—art 7 n 25 ff.
8 See Part B—art 8 n 33 ff.
9 See Part B—art 6 n 3 ff.
10 See eg E Avgouleas, ‘The Mechanics and Regulation of Market Abuse’ (OUP 2005); Helena Bolina, ‘Market Manipulation and Insider Dealing in the New Market Abuse Directive (2003/6/EC)’ (2001–2002) 4 Revue Européenne de Droit Bancaire et Financier 555; Guido A Ferrarini, ‘The European Market Abuse Directive’ (2004) 41 Common Market Law Review 711; Jesper Lau Hansen, ‘MAD in a Hurry: The Swift and Promising Adoption of the EU Market Abuse Directive’ (2004) 15 European Business Law Review 183; Niamh Moloney, ‘New Frontiers in EC Capital Market Law: From Market Construction to Market Regulation’ (2003) 40 Common Market Law Review 809.
12 See Commission, Proposal for a Regulation of the European Parliament and of the Council on insider dealing and market manipulation (market abuse) (n 2) 3; see also the so-called de Larosière Group Report of the High-level Group on Financial Supervision in the EU www.ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf.
13 See n 11.
14 See n 12.
15 See Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on insider dealing and market manipulation (market abuse)’ (n 2) 3.
16 See Part B—art 7 n 16 ff.
19 For the influence of the Market Abuse Regulation on the civil liability for the violation of the prohibitions set out by it see Part A—Private Enforcement of the Market Abuse Regulation in European Law.
20 See n 8.
21 For an overview see eg Moloney (n 4) 766 ff.
22 See art 35.
23 Marloes van Rijsbergen, ‘On the Enforceability of EU Agencies’ Soft Law at the National Level: The Case of the European Securities and Markets Authority’ (2014) 10 Utrecht Law Review 116; Edoardo Chiti, ‘European Agencies’ Rulemaking: Powers, Procedures and Assessment’ (2013) 19 European Law Journal 93.