knowledge 15 June 2020 |

COVID-19: Market Abuse – A Reminder of the Risks

Overview of Inside Information Disclosure Requirements

Under Article 17 of MAR, an “issuer” must inform the public as soon as possible of inside information which directly concerns the issuer, including an issuer with financial instruments admitted to trading on:

• a regulated market, such as the Regulated Market of the Irish Stock Exchange, trading as Euronext Dublin (“Euronext Dublin”);
• a multilateral trading facility such as Euronext Dublin’s Euronext Growth Market and Global Exchange Market; or
• an organised trading facility.     

“Inside information” is information which is of a precise nature, has not been made public and which:

• relates, directly or indirectly, to one or more issuers or to one or more financial instruments; and
• would, if generally available, be likely to have a significant effect on the price of those financial instruments or on the price of related derivative financial instruments.

In certain circumstances, an issuer can delay the disclosure of inside information so as not to prejudice its “legitimate interests”, provided the following three conditions are met:

• immediate disclosure is likely to prejudice the legitimate interests of the issuer;
• delaying disclosure is not likely to mislead the public; and
• the issuer is able to ensure the confidentiality of that information.

COVID-19 and Inside Information

The circumstances associated with COVID-19 present new compliance challenges for inside informaition disclosure policies and procedures. For example, inside information is likely to be more prevalent during the COVID-19 period as issuers are likely to look for additional capital leading to an increase in primary market activity, including increasing the interactions and flows of inside information between issuers, advisors, and other market participants. Moreover, it may prove challenging for an issuer’s existing controls and procedures to continue to effectively protect against the unlawful disclosure of inside information in working from home arrangements in the same manner as in an office environment.  Moreover, what constitutes inside information may change rapidly and what does not constitute inside information today, could become inside information tomorrow.

The Regulatory Response

Protecting market stability and protecting market integrity are two sides of the same coin and both the Central Bank of Ireland (“CBI”) and the European Securities and Markets Authority (“ESMA”) have taken steps to remind issuers of the need to comply with the inside information disclosure requirements.

In its FAQ for regulated firms, the CBI reminds issuers and other market participants of their ongoing monitoring, disclosure and reporting obligations, including their obligation under Article 17 of MAR to disclose inside information to the market as soon as possible, e.g. in circumstances where there is a material change to financial expectations for the issuer.

The CBI has also warned that relevant regulated financial service providers must continue to employ appropriate trade surveillance, including to detect potential market abuse and breach of position limits notwithstanding the fact that many employees may be working off-site. They must also apply the necessary focus on operational risks.

For its part, ESMA in its initial statement on the COVID-19 pandemic on 11 March 2020 reminded issuers of their obligation to “disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation”.

Compliance Measures

Issuers of financial instruments should ensure that their market abuse policies and procedures are sufficiently robust, with adequate consideration given to COVID-19 related business developments. In particular, an issuer should ensure that its processes allow it to respond to rapidly evolving circumstances and to carefully judge what information a reasonable investor would now be likely to use as part of their investment decisions in the context of COVID-19.  In this respect, it is worth noting that the UK’s Financial Conduct Authority has given the following examples of information that could significantly impact on an issuer’s share price:

• Detail on future financial performance, such as access to finance and funding. This includes through government schemes, significant changes in cash flow patterns, force majeure or termination rights in material contracts or financial arrangements, and changes to dividends or buy-back schemes.
• The issuer’s ability to continue or resume business, such as changes in strategy or business plans, business resumption plans, arrangements for staff returning to work, and supply chains. 

For the purposes of handling and controlling inside information, issuers should ensure that their insider lists are kept up-to-date. They should also consider whether it would be useful to repeat or update training to refresh staff on how they should be handling inside information particularly in the context of new working arrangements.

Issuers should keep careful records of their decisions around the disclosure of inside information. Given the regulatory focus on compliance with MAR in the context of COVID-19, it cannot be excluded that an issuer may be required to justify decisions made once the crisis has passed and good records will play an essential role at this point.

In instances where an issuer wishes to delay the disclosure of inside information, it will need to give careful consideration to whether or not it can comply with the relevant conditions outlined above. In particular, in rapidly changing market circumstances a decision to delay the disclosure of inside information may be more likely to mislead the public than might usually be the case. Moreover, it may be more difficult to ensure the confidentiality of the relevant information, in particular in light of working from home arrangements.