New rules on insider trading and duty to disclose
The introduction of the EU Market Abuse Regulation will lead to significant changes in the rules on the handling of inside information and listed companies' duty to disclose. The Law Commission on Securities presented its proposal for implementation of the rules in Norwegian law on 23 June 2017. This newsletter summarizes key elements in the recommendation from the Law Commission.
The Law Commission's proposal entails that the Market Abuse Regulation1 (MAR) and associated regulations are implemented in Norwegian law. The proposal is presented in NOU 2017: 14,2 which will now be circulated for consultation. The relevant rules came into force in the EU as early as on 3 July 2016, but one should not expect entry into force in Norwegian law until 2018 at the earliest.
The proposal is to repeal major parts of Chapters 3, 4 and 5 of the Securities Trading Act and replaced these by a reference to MAR, which shall apply as Norwegian law as is. There are only a few points, where room for national choices and adaptations are allowed.
The rules apply to financial instruments. As emission quotas and certain commodity derivatives, etc. are defined as financial instruments for the implementation of MiFID II, the scope of MAR is expanded correspondingly. In the following, we focus on the rules for issuers of shares and bonds.
Through MAR, the scope of the market abuse rules is expanded from financial instruments that are sought traded or traded on a regulated market (e.g. Oslo Stock Exchange or Oslo Axess) to also include instruments sought traded or traded on multilateral trading facilities (e.g. Merkur Market). Companies listed on Merkur Market are already in subject to the essential requirements on handling inside information and trading obligations through the Securities Trading Act and the Oslo Stock Exchange's rules.
The rules will also apply to instruments traded on so-called organized trading facilities (OTF). This is a new type of alternative marketplace for bonds and derivative instruments introduced by MiFID II. We note that Nordic ABM is not expected to be classified as OTF.
Handling of inside information
The essence of the definition of inside information is not changed. The principles that inside information may occur at an early stage in connection with step-by-step processes known from the European Court of Justice judgment in the so-called Daimler case, are explicitly stated in the wording of the Regulation.
Furthermore, it is specified that analyses may be inside information, e.g., where they contain "views from a recognized market commentator or institution that may inform the prices of related financial instruments".
Confidentiality in relation to inside information is continued. While the current Norwegian law is based on the recipient's need for information ("unauthorized") when deciding whether disclosure may be allowed, MAR uses the issuer's reasoning for disclosing the information (normal exercise of employment relationship, etc.) as basis. However, the Law Commission assumes that the practical consequence of this will be limited. It is also explicitly stated that disclosure of advices to or incitements of insider trading will be in breach of confidentiality.
The requirements for keeping insider lists are continued. The circle of persons is narrowed, and will only cover only persons with access to inside information who work or perform assignments for the issuer are included. These persons must confirm in writing that they are aware of the duties that accompany access to inside information and related sanctions. The requirements for information on the insider list are expanded, including address, telephone number and national identity number. The lists shall be kept in a standardized format and shall be sent to the Supervisory Authority immediately upon request. Companies listed on so-called growth markets for SMEs (including Mercury Market), will be subject to less onerous requirements.
Specific rules are introduced for so-called market soundings, i.e. presounding exercises by placing financial instruments in the primary or secondary market and acquisition offerings. The rules impose an obligation to assess whether inside information is disclosed, and requirements for proper handling, documentation, etc. Duties are imposed both on the communicator of the information (issuer, brokerage house) and the recipient. The operators are not obligated to follow the rules, but compliance provide a "safe harbour" in relation to confidentiality regarding inside information. The specific Norwegian prohibition against advisory will be repealed, and thus the explicit prohibition against encouraging a person not to trade. However, the Law Commission assumes that such advice may constitute a breach of the prohibition against disclosing inside information to unauthorized persons.
According to MAR, cancellation of submitted orders upon receipt of inside information could be considered abuse of inside information. This is the opposite of the principle in current Norwegian law, where non-cancellation may be affected by the prohibition against insider trading. The Law Commission assumes that the cancellation obligation will be repealed with MAR, and consequently that the submitted order may, and as a starting point must, stand if the investor receives inside information after the order is made. However, changes and cancellations that cannot be considered abuse will not be affected. This can typically be the situation whenb, after placing a purchase order, you receive inside information of a positive nature and choose to cancel.
The exemplifications of what does not constitute abuse of inside information are replaced by more specific regulations. For example, trade by corporate entities is not included if there are adequate internal procedures, neither the trader nor those who had the opportunity to influence the decision possessed inside information and the corporate entity did not encourage or affect the person to trade. Furthermore, trading to fulfil legal obligations are as a starting point not included. The fact that an investor's planned trading may be inside information also prevents him/her from completing the transaction.
The regime of "safe harbour" from the rules on market manipulation and insider trading in connection with buyback programs and price stabilization is continued. However, the Law Commission assumes, without this being further substantiated, that "the exception applies only to inside information relating to the buyback programs or stabilization measures". If this is correct, the rules appear to be of limited significance as a safe harbour from insider trading.
Duty to disclose
The main elements of the duty to disclose for listed companies and the possibility to delay disclosures are continued. In order to increase the issuers' predictability, ESMA has in Guidelines of 20 October 2016 provided further guidance on the interpretation of the delay in disclosure of information.3
The statutory obligation to notify Oslo Stock Exchange when the company decides to delay disclosure is replaced by a notification obligation to the Supervisory Authority at the time of disclosure. National law may stipulate that the notification shall be accompanied by a written justification for the delay, but the Law Commission does not propose such a in Norway. Whether the Oslo Stock Exchange in its Issuer Rules will continue the notification requirement at the time of delayed disclosure, remains to be seen.
In addition, a separate regime for delayed disclosure is introduced in credit and financial institutions where the Supervisory Authority may, on further terms, approve delayed disclosure regardless of whether the terms of delayed disclosure are otherwise fulfilled.
Specific duties for primary insiders
The rules on notification obligations for primary insiders are subjected to comprehensive changes.
- While current rules apply only to shares, equity certificates, convertible bonds and subscription rights, etc., the scope will now be defined as financial instruments, including, e.g., bonds and derivatives with such instruments underlying. Furthermore, the rules will be made applicable from the date of the trading application, and will include not only regulated market but also MHF and OHF. The rules will also include additional types of transactions, such as inheritance, gifts, mortgages and loans.
- The circle of persons is narrowed somewhat, inter alia, so that the management in companies in the same group and external auditors fall outside. The notification obligation for the company's trading in its own shares, as well as trading carried out by shareholders represented on the board, are also repealed.
- The circle of close associates is expanded, inter alia, so that companies in which the primary insider or his/her close associate is in a leading position, e.g. board position, are included, even if the person does not have an ownership interest in the company in question. The notification obligation is imposed on the close associate, but the notification must be sent by the issuer.
- The person concerned must have completed transactions equivalent to a gross amount of EUR 5,000 per calendar year before the notification obligation occurs.
- The notification shall be sent "promptly and no later than three business days". The Law Commission does not discuss how the internal contradiction in the wording of the Regulation should be interpreted. Under the current rules, the latter deadline has in practice been assumed (opening on the following trading day), but the question is further topicalized when the deadline is extended to three days.
Rules on trading prohibition in advance of financial reports are reintroduced (red periods) as we had in Norway until 2001.
- Primary insiders are prohibited from conducting transactions in shares or bonds issued by the company, or financial instruments related thereto for a period of 30 calendar days prior to the publication of a financial report that the company is obliged to disclose pursuant to law or stock exchange rules.
- With the removal of requirements for publishing quarterly reports, red periods will initially only apply upon publication of the interim report, as well as the annual accounts (possibly preliminary annual accounts where published). For financial undertakings, which are subject to separate reporting requirements, red periods will also apply.
- Under certain conditions, transactions may be conducted in red periods, including where there are serious financial problems that necessitate immediate sales, employee share programs, etc.
The rules on primary insider's duty to investigate before trading are proposed to be repealed.
The statutory requirement to send an overview of primary insiders to Oslo Stock Exchange is replaced by a legal basis for the Ministry of Finance to set this out in regulations.
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