On 20 October 2011, the European Commission proposed a new directive on criminal sanctions for insider dealing and market manipulation. This proposal was approved by the European Parliament on 4 February 2014. In this legal alert, we outline the main changes.
1.1 In 2003, the Market Abuse Directive (2003/6/EC) (the "MAD") entered into force. The MAD introduced rules on the preventing of insider trading and market manipulation (market abuse). These rules have been implemented in the national legal framework of the Member States of the European Union.
1.2 In 2010, the European Commission services launched a public consultation on the review of the MAD, as it was felt that the MAD was not adequate. The outcome of the consultation (inter alia) shows that there are gaps in the regulation of new types of trading platforms and in the regulation of commodities and commodity derivatives. Furthermore, effective enforcement possibilities are lacking. Currently, investors who trade on insider information and manipulate markets by spreading false or misleading information can avoid sanctions by taking advantage of differences in laws and regulations between the Member States. For example, in some Member States the regulators lack effective sanctioning authority while in other Member States criminal sanctions are not available for certain insider dealing and market manipulation offences.
1.3 As part of its review of the MAD, the European Commission proposed, on 20 October 2011, both a Regulation on insider dealing and market manipulation and a Directive on criminal sanctions for insider dealing and market manipulation. These proposals are to replace the MAD. On 4 February 2014, the European Parliament approved the European Commission's proposal for a Directive on criminal sanctions for insider dealing and market manipulation (the "Directive"). The Directive establishes European Union-wide minimum rules for criminal sanctions for market abuse.
2.1 The Directive defines the following offences (jointly the "Offences"):
- insider dealing;
- recommending or inducing another person to engage in insider dealing;
- unlawful disclosure of inside information; and
- market manipulation.
2.2 These Offences, to the extent they are serious and committed intentionally, should be regarded by Member States as criminal offences. It is noted that inciting, aiding and abetting as well as attempting to commit an Offence, is also punishable as a criminal offence.
2.3 Recommending other persons to engage in insider dealing or inducing other person to engage in insider dealings, within the meaning of the Directive, is an Offence when a person with inside information recommends, on the basis of such information; another person (a) to acquire or dispose of financial instruments to which that information relates, or induces another person to effectuate such acquisition or disposal, or (b) to cancel or amend an order relating to a financial instrument to which such inside information relates, or to induce another person to make such cancellation or amendment.
2.4 Certain activities are not covered by the Directive and the Directive does not apply (provided certain conditions are met) to:
- trading in own shares in buy-back programmes; or
- trading in securities or associated instruments for the stabilisation of securities; or
- transactions, orders or behaviours carried out in pursuit of monetary, exchange rate or public debt policy.
3. CRIMINAL SANCTIONS FOR NATURAL PERSONS
The Offences are punishable by criminal sanctions which are effective, proportionate and dissuasive. In order for the sanctions for the Offences to be effective and dissuasive, the Directive provides for maximum sanction levels of at least four years' imprisonment for market manipulation, insider dealing and recommending or inducing another person to engage in insider dealing and two years for the unlawful disclosure of inside information.
4. CRIMINAL SANCTIONS FOR LEGAL ENTITIES
4.1 Criminal and non-criminal fines can also be imposed on legal entities. In addition, legal entities can face other sanctions such as exclusions from entitlement to public benefits or aids, temporary or permanent disqualification from carrying out commercial activities, placement under judicial supervision, judicial winding-up or temporary or permanent closure of establishments which have been used for committing the Offence in question.
4.2 With respect to the liability of legal entities, the Member States must take the necessary measures to ensure that legal entities can be held liable in relation to the Offence committed for their benefit/on their behalf by any person who is authorised to (i) represent such legal entity, (ii) take decisions on behalf of such legal entity or (iii) exercise control over such legal entity. For the sake of clarity: liability of legal entities shall not exclude criminal proceedings against the natural persons involved in the Offence (e.g. as perpetrators, inciters or accessories).
4.3 In addition, Member States must take the necessary measures to ensure that legal entities can be held liable where a lack of supervision or control by a person referred to in paragraph 4.2 above made it possible for the Offence to occur.
5. NEXT STEPS
5.1 The Member States must transpose the Directive into national law within two years after the Directive has entered into force.
5.2 As mentioned, the Directive is one part of the review of the MAD. The second part (the Regulation on insider dealing and market manipulation) will still need to be voted on. The final vote on the Regulation on insider dealing and market manipulation is expected to take place when the MiFID/MiFIR proposals are adopted; this is expected to take place in early 2014.