The EU and Market Abuse

Abstract

The European Union recently revised its rules to fight insider dealing and market manipulation, the so-called Market Abuse Regulation (MAR) and Criminal Sanctions for Market Abuse Directive (CSMAD). The new rules are meant to improve legal certainty for market participants, extend the regulatory coverage to alternative trading venues and over-thecounter (OTC) transactions, address potential fraud in spot and derivatives markets for commodities, and enable more effective enforcement and tougher sanctions. With the 2014 Global Market Sentiment Survey (in which members rated market fraud as the most serious ethical issue facing global markets) as a backdrop, CFA Institute participated in the consultations leading to market-abuse reform, arguing in favour of transparency, effective enforcement, and dissuasive sanctions. We also highlighted the importance of uniform rules and supervisory and judicial cooperation across borders to improve market integrity. In particular, two important aspects of the new rules deserve attention: the prevention of market abuse when providing investment recommendations and engaging in market soundings. These provisions will be a novel development in most jurisdictions and will have a material impact on everyday professional practice. Recommending that another person engage in insider dealing is well established as market abuse. Under the new rules, any inducement or persuasion also will amount to abuse. In other words, if you possess inside information in the legitimate exercise of your profession, you may not give any indication to deal (or not to deal) in the instruments concerned—even if you do not disclose the existence of inside information to the recipient or if you hold other powerful arguments to support your advice. As for the recipient, following the recommendation would amount to insider dealing if the recipient knew or should have known the recommendation was based on inside information. In cases of serious violations committed with intent, both parties could face prison, which was not previously the case in all European countries. In addition, EU member states may extend the possibility of prison sentences to persons who commit abuse without intent and do so out of negligence (the “should have known” bit). In all instances, administrative fines may apply.