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Market Abuse alert
May 2016
Implementation of the new market abuse regime in the Netherlands – legislative proposal published
On 3 July 2016, the provisions of the Market Abuse Regulation and the new Market Abuse Directive will become applicable. The regulation will directly apply to the Member States of the European Economic Area. On 19 April 2016, the Dutch legislator published its legislative proposal for an act to implement the new directive and some provisions of the regulation. The existing Market Abuse Directive from 2003 and, the implementing Directives published by the European Commission under this Directive, and the current Dutch laws and regulations with respect to market abuse will be repealed as of 3 July 2016. In this update, we address the most important changes of the legislative proposal.

In this update: 
2. Territorial scope 
3. The four core prohibitions of the MAR
4. Market soundings
5. Publication of inside information
6. Managers' transactions
7. Insider lists
8. Insider trading policy
9. Internal procedures for financial institutions
10. Supervision and sanctions
11. Delegated acts and timing
1. Background
The Market Abuse Regulation (Regulation 596/2014, the "MAR") and the new Market Abuse Directive (Directive 2014/57/EU, the "MAD 2") are the result of the update of the European regulatory framework provided by the original Market Abuse Directive (2003/6/EC). The new market abuse regime aims to keep pace with market developments and to strengthen regulators' investigative and sanctioning powers. The MAR is a regulation incorporating the core provisions of the new European market abuse regime to ensure a uniform interpretation and application of the market abuse provisions within Member States of the European Union. Both the MAR and the MAD 2 have been introduced to toughen and harmonise sanctions within Member States and to ensure that criminal enforcement of market abuse provisions is possible. The implementation of MAD 2 does not result in fundamental differences within the Netherlands because criminal enforcement has already been an option for some time. However, the legislative proposal significantly increases the maximum administrative fines for infringements of market abuse provisions and extends the supervisory powers of the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten, the "AFM"). 

Scope and key elements of the new market abuse regime
2. Territorial scope
The current market abuse regime in the Dutch Financial Supervision Act (Wet op het financieel toezicht, the "Wft") applies to a broad range of financial instruments and derivatives. The current regime in the Wft also applies to insider dealing in or from the Netherlands in financial instruments that are admitted to trading on a trading platform similar to a regulated market or a multilateral trading facility outside of the European Union. However, the scope of the MAR is more restrictive. The provisions of the MAR are not applicable to actions and omissions concerning financial instruments that are exclusively traded on a trading platform outside the European Union. The legislative proposal does not seek to extend any of these MAR provisions.

Therefore, the market abuse regime for companies incorporated in the Netherlands (naamloze vennootschapen or besloten vennootschappen) that are only listed outside the European Union, will no longer be relevant from 3 July 2016.

3. The four core prohibitions of the MAR
The MAR prohibits:

(i) engaging or attempting to engage in insider dealing;
(ii) recommending another person to engage in insider dealing or inducing another person to engage in insider dealing; 
(iii) unlawfully disclosing inside information; and
(iv) engaging in or attempting to engage in market manipulation.

Insider dealing also covers over-the-counter trades which can have an effect on the underlying instrument (or vice versa), including spot commodity contracts. In the MAR, the cancellation of orders falls under insider dealing. Furthermore, the definition of inside information is explained in more detail.

With respect to market manipulation, several activities – including benchmark manipulation, certain aspects of high-frequency trading and the use of algorithms – are covered by the MAR. It also contains examples and indicators of market manipulation, which were not set out in the existing Directive.

Unlawful disclosure of inside information, or 'tipping', occurs when a person possesses inside information and discloses that information to any other person. Exemptions apply to (i) insiders who disclose the information in the normal exercise of a person's employment, profession or duties, and (ii) other persons in possession of inside information when this person is unaware of the fact that he possesses inside information.

New administrative requirements for listed companies
4. Market soundings
Market soundings (marktpeilingen) are described as the communication of information, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it in terms of, for example, size or pricing. Market soundings are deemed to be made in the normal exercise of a person’s employment, profession or duties where the disclosing market participant complies with the administrative requirements laid down for market soundings.

When conducting a market sounding, a listed company or other market participant is bound by the following:
  • The disclosing market participant must make, and update where relevant, a written report of its conclusion and reasons for deciding whether market sounding involves the disclosure of inside information;
  • Before the disclosure is made, the market participant must;
    - obtain the consent of the receiving party to receive inside information;
    - inform the receiving party of the legal framework involving market abuse;
    - inform the receiving party that by agreeing to receive the information he is obliged to keep the information confidential;
    - the receiving party must be identified, including the individuals acting on behalf of the potential investor, and the date and time of the disclosure must be set out.
  • The records must be kept for at least five years and must be sent to the AFM on request.
On 25 September 2015, the European Securities Markets Authority ("ESMA") published two draft technical standards specifying the details of the arrangements, systems and disclosure templates relating to market soundings in Annex VIII and Annex IX. It is expected that the European Commission will finalise these standards at short notice. ESMA also published a consultation paper on 28 January 2016 concerning the MAR, specifying guidelines for persons receiving market soundings. 

5. Publication of inside information
The current market abuse regime in the Wft requires listed companies to publish inside information as soon as possible. Listed companies are, however, allowed to delay the disclosure of such information if, and only if, three cumulative requirements are met. The MAR, in principle, comprises the same requirements for delaying the publication of inside information, although the following additional administrative requirements also apply:
  • Listed companies must notify the AFM of the delay immediately after the information is disclosed to the public;
  • Listed companies must keep a written explanation of how the conditions of the delay are met; and
  • Listed companies must provide the AFM of this explanation upon request. 
Details of these requirements for listed companies will be set out in the Decree on the Implementation of the MAR and the MAD 2 (Besluit implementatie verordening en richtlijn marktmisbruik, the "Decree"). The Decree will be published before the entry into force of the MAR.

Furthermore, ESMA published draft technical standards including and specifying extensive details for appropriate public disclosure and for delaying the disclosure of inside information in Annex XII. This has been implemented in the European Commission Regulation 2016/522 of 17 December 2015.

6. Managers' transactions
The MAR requires persons discharging managerial responsibilities ("Managers"), as well as persons closely associated with them, to notify the listed company and the AFM of transactions in financial instruments. Managers include managing directors, members of a supervisory body and other senior executives of listed companies as defined in the MAR. These are senior executives who have regular access to inside information and powers to take managerial decisions affecting the future developments and business prospects. It is unclear what the exact scope of this definition is in practice. Although the current market abuse regime contains comparable requirements, some significant changes arise as result of the MAR:
  • The notification of Managers' transactions to the AFM must be made within three business days – currently five business days – after the date of the transaction.
  • Listed companies must notify its Managers in writing of the obligations under the MAR, specifically with respect to Managers' transactions. This obligation is new.
  • Managers must notify the persons closely associated with them (e.g. spouses, children) of their obligations under the MAR in writing and shall keep a copy of this notification. This obligation is new.
  • Not only transactions relating to the shares of the issuer, but also transactions relating to debt instruments of that issuer must be notified;
  • A closed period of 30 days prior to the publication of certain financial results and information is introduced during which Managers are not allowed to conduct certain transactions in financial instruments. 
The MAR also explicitly requires listed companies to publish Managers' transactions within three business days. Alternatively, the MAR states that national law may provide competent authorities to make this information public. However, it is not clear in the legislative proposal whether publication of the Managers' transactions in the AFM register by listed companies sufficiently fulfills this obligation. Therefore, whether the approach in the legislative proposal complies with the publication requirement of the MAR remains uncertain.

On 28 September 2015, ESMA published draft technical standards specifying the details of the format and template of the notification and public disclosure of Managers' transactions in Annex XIV. This has been implemented in the European Commission Implementing Regulation (EU) 2016/523 of 10 March 2016.

Exemptions to conduct transactions during closed periods are specified in the European Commission Regulation 2016/522 of 17 December 2015. These relate, for example, to an employee share or saving scheme.

7. Insider lists
Listed companies must maintain an insider list similar to that under the current market abuse regime in the Wft. However, significantly more information is required. The Commission Implementing Regulation 2016/347 of 10 March 2016 formalises ESMA's draft technical standard of 28 September 2015. It contains an electronic template, requiring an extensive amount of personal information in relation to each insider.

8. Insider trading policy
The current market abuse regime in the Wft requires listed companies to maintain an insider trading policy. The MAR does not contain such a requirement. However, it is considered good practice for listed companies to maintain an insider trading policy. These policies should be updated before 3 July 2016 in light of the new provisions in the MAR and the changes to the current market abuse regime.

9. Internal procedures for financial institutions
The current market abuse regime in the Wft contains certain specific provisions with regard to insider trading for certain financial institutions such as banks, investment firms, investment funds and its managers, clearing institutions, pension funds and insurers. We note that these provisions of the Wft stay intact. Therefore, financial institutions within the scope of these provisions must maintain an internal policy on insider dealing, conflicts of interest and adequate control mechanisms. These internal policies must be amended to include the effective rules and procedures to report breaches of the MAR. The Decree may specify further details in this respect.

The MAR requires market operators and investment firms that operate a trading venue, to establish and maintain effective arrangements, systems and procedures aimed at preventing and detecting (attempted) insider dealing and (attempted) market manipulation. The same obligation exists for persons professionally arranging or executing transactions. As a result, such parties are obliged to submit a so-called STORs (Suspicious transactions and orders report). On 28 September 2015, ESMA published draft technical standards for the appropriate arrangements, systems and procedures as well as notification templates to be used for preventing, detecting and reporting market abuse in Annex XI. This is implemented in the Commission Delegated Regulation of 9 March 2016 (no publication number available yet).

10. Supervision and sanctions
In line with the goals of the MAR and the MAD 2, the legislative proposal contains provisions to extend the powers of the supervisor and to introduce tougher administrative sanctions. For example, the maximum administrative fines are higher and a fine relating to 15 per cent of the consolidated annual turnover will be introduced.

The AFM expressed that it wishes to receive certain supervisory powers contained in the MAR, which are presently in the hands of the Dutch Public Prosecution Service (Openbaar Ministerie). Examples include (i) requesting existing data traffic records held by a telecommunications operator and (ii) requesting the freezing or sequestration of assets. However, the decision on further expanding the powers attributed to the AFM will be taken at a later stage by the Dutch legislator. This might be implemented as part of a separate act.

11. Delegated acts and timing
Although the MAR, the MAD 2 and the legislative proposal have been published, several details of the rules, requirements and exemptions from the upcoming market abuse regime still need to be implemented by the European Commission and, in the Netherlands, in the Decree.

Besides the draft technical standards, ESMA also published a consultation paper on guidelines on the MAR on 28 January 2016, containing (i) guidelines for persons receiving market soundings, and (ii) guidelines on legitimate interests of listed companies to delay the disclosure of inside information and situations in which the delay of disclosure is likely to mislead the public.

By 9 May 2016 the European Commission had finalised several technical standards drafted by ESMA and it is expected that the European Commission will shortly finalise other technical standards. The following standards have now been published, although some of are published without its official number:  
The legislative proposal has now been sent to the Dutch Parliament (Tweede Kamer) and has to be implemented into Dutch law before 3 July 2016.

Stibbe will organise a seminar regarding the practical consequences of the new market abuse regime in the Netherlands for listed companies and financial institutions before 3 July 2016. 

Daan Doorenbos
Rogier Raas
Steven Hijink
Soeradj Ramsanjhal
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