Last month, the Financial Conduct Authority (FCA) – the UK’s market abuse regulator – fined the former chairman of a London Stock Exchange-listed company £80,000 for unlawfully disclosing inside information. The fine was imposed after the FCA found that the chairman had disclosed inside information about the company to two major shareholders (one of whom was known to have had active intentions to build a more significant stake in the company) before the information was disclosed to it Market.
The rule the Chairman broke is easy to read – inside information must not be disclosed “unlawfully”. In other words, the Chair was found to have disclosed inside information outside of the “lawful” disclosure framework established by the MAR, which in short only permits the disclosure of inside information: (i) in the course of one’s employment, profession or duties, (ii) publicly through a company announcement; or (iii) as part of a market sounding.
Bearing in mind that market abuse rules in the UK are the same as in Malta (even post-Brexit), a number of important lessons and observations are in order.
- “Considerable experience and position“. In its decision, the FCA found that the Chairman should have known that the information he was disclosing was or could be inside information and that the disclosure was not made in the normal exercise of his employment, profession or duties. The FCA reached this conclusion after considering a number of factors, including the Chairman’s “considerable experience and position” and the fact that he had previously received training on the Market Abuse Regulations (MAR). In other words, the chairman’s seniority leads the FCA to place a higher level of accountability on the chairman than on the average staff member. While this observation should not be interpreted to mean that less experienced employees can do as they please with the inside information they possess, it should serve as a reminder to older and more experienced employees to work with even greater caution.
- “Couldn’t use his wits“. The FCA’s key finding was that the Chairman acted negligently in disclosing the information, but also that he “did not properly focus on the specific question of what, if any, information he could properly disclose, and when and on.” how and by whom”. The harshness with which the FCA dealt with this omission underscores the importance of being able to justify any action retroactively, the success of which will depend on the integrity of the records kept. It is therefore prudent to develop and implement sound record-keeping practices where all major decisions, even if unilateral, and the underlying reasons are properly recorded for posterity – bearing in mind that an investigation such as the one under consideration here relies heavily on documentary evidence.
- “No clear, formal advice received“. The FCA also cited the chairman’s failure to “seek clear, formal advice” as one of the factors contributing to his negligence in unlawfully disclosing inside information. While this observation relates to the importance of always being able to justify one’s actions and decisions, it separately underscores the importance of maintaining an open dialogue with legal counsel or compliance officers who may be able to resolve issues from afar and offer objective advice on matters that may not be as simple as they seem on paper.
- “Should have realized that the information he disclosed was or could be inside information“. Interestingly, at the time of the (unlawful) disclosure of the information, the company had not officially classified the information as “inside information” within the meaning of MAR, as it awaited some clarification before it would be able to make the information public. Nonetheless, the FCA found that the Chairman “should have realized that the information he was disclosing constituted or could constitute inside information”. The FCA therefore clarified that while the information was not yet in a state in which it could be disclosed to the market, this did not prevent it from being “inside information” which Article 7 of MAR sets out to scrutinize and this does not state whether the information is currently appropriate for disclosure.
- Robust policies and procedures. Finally, it is worth noting that the incident in question took place even though the company had a market disclosure policy that established various procedures for handling inside information. While it is beyond the scope of this article to comment on the effectiveness of corporate policy (not least because the policy is not publicly available), suffice it to say that even the best policies in the world cannot prevent unlawful conduct. While well-formulated policies are, and always will be, key, it is equally important to ensure that (a) policies are reviewed and updated by regulators and (b) all employees and board members are well acquainted with those policies. In this context, the European Securities and Markets Authority has stated that “Issuers that do not have effective arrangements, systems, procedures or other types of controls for identifying, handling and disclosing inside information are likely to fail in their duty to disclose inside information as promptly as possible(MAR Review Report, September 2020).
Even if MAR “shall not prohibit discussions of a general nature about business and market developments between shareholders and management about an issuer’ (Recital 19 MAR) it becomes clear – not least because of the high penalty imposed on the chairperson concerned – that selective disclosures of insider information are not viewed positively unless these disclosures are made in accordance with MAR. For that reason, and given the increased regulatory focus on market abuse in recent months, we would suggest heeding the age-old adage that “the less said, the better!”
This article was first published in The Times (September 19, 2022).