FCA publishes Primary Market Bulletin 52 – Market Abuse Regulation

The FCA has published Primary Market Bulletin 52, which focuses on certain issuer obligations under the UK Market Abuse Regulation (MAR) and includes some useful reminders on the application of MAR in key areas. 

In PMB 52, the FCA:

• highlights some recent observations from its live market monitoring concerning issuers' ability to identify and make public information that constitutes inside information under MAR. The FCA addresses three common scenarios where it has seen differing approaches by issuers: (i) offer processes, (ii) the preparation of periodic financial information and (iii) CEO resignations and appointments. The FCA also suggests steps that issuers can consider taking to ensure they are well prepared to correctly identify inside information;
• considers the dissemination of information by issuers during shareholder calls and meetings, in particular the use of communication apps (such as WhatsApp or LinkedIn) to interact with groups of smaller private shareholders. The FCA reminds issuers of the application of MAR in this context and sets out steps issuers can take to limit the risk of unlawful disclosure of inside information or market manipulation through misleading statements; and
• discusses the dissemination of regulatory information by issuers during interruptions to Primary Information Provider (PIP) services and includes actions for issuers to consider so they can be prepared in the event of a PIP outage.

Identifying inside information in certain situations

The FCA highlights the following observations from its live market monitoring relating to issuers' ability to identify and make public information that is inside information under MAR.

1. Offer processes

The FCA notes that whether receipt of an offer is inside information should be assessed on a case-by-case basis. Relevant factors to take into account could include the identity of the bidder, the nature and quantum of the offer and the likelihood that the offer will be recommended by the board of the listed or traded target company. 

The FCA states that it has seen cases where advice has been provided by the company's advisers that inside information crystallised only when a final offer was accepted by the company’s directors as the likelihood of the transaction taking place before acceptance was not deemed certain.

Under MAR, information is precise if it indicates a set of circumstances which exist or which may reasonably be expected to come into existence. The FCA goes on to cite the Hannam case, where the Tribunal held that this includes a more than fanciful chance of the future event or circumstances coming into existence or occurring, though the threshold was lower than the event or circumstances being 'more likely than not'. On this basis, the FCA concludes that it is possible that the receipt of an offer could be inside information before it has been formally considered and recommended by the board.

Amongst other things, the FCA reminds issuers that where an offer is in scope of the Takeover Code, there may be circumstances where a matter is not required to be made public under the Takeover Code but which still triggers a MAR disclosure obligation.

2. Preparation of periodic financial information

The FCA references its previous guidance in Technical Note 506.2 on the classification of periodic financial information, in which it emphasised that issuers should assess on an ongoing and case-by-case basis whether the information they hold is inside information, beginning from the assumption that information relating to financial results could constitute inside information.

The FCA notes that it has seen cases where finance packs, which were presented to the board weeks before a scheduled earnings statement is published, showed revenues did not meet internal forecasts by the company and external consensus estimates by analysts. In some cases, issuers have chosen not to disclose performance that is significantly behind internal forecasts and external consensus on the basis that below-forecast performance will be compensated by significant over-performance later in the year. Where this has not happened, in certain cases, the subsequent publication of the financial statements caused the share price to fall between 40% and 50%. The FCA has seen similar effects from the loss of major contracts - an event which may also take time to become certain.

The FCA reiterates that, in such scenarios, where the information could be of a precise nature such that it constitutes inside information at an early stage of the process, an issuer will have to disclose the information in their scheduled results announcement as soon as possible. Whilst delayed disclosure of the inside information is permitted under Article 17(4) of MAR, this only applies in limited circumstances. Technical Note 506.2 provides further information on when the relevant conditions for delayed disclosure may be satisfied in the context of the preparation of financial information. Of particular relevance will be where the issuer has previously stated financial objectives or targets which are now unlikely to be met.

Further, DTR 2.5.4G provides that an issuer should not delay disclosure of the fact that it is in financial difficulty or that its financial condition is worsening, though it may be able to delay disclosure of the fact or substance of negotiations to deal with such a situation. 

The FCA confirms its expectation that, where an issuer is not able to meet the conditions of Article 17(4) of MAR, it should prepare and release an announcement that discloses the inside information as soon as possible and in a manner that enables the public to correctly assess the inside information.

In addition, as per the guidance in Technical Note 521.3, justifying non-disclosure of information by offsetting negative and positive news is not acceptable.

3. CEO resignations and appointments

The FCA notes that it has seen cases where press speculation arises that an incumbent CEO is standing down, a shortlist of successors is identified and a replacement will shortly be appointed. In such cases, the issuer has classified the resignation of the CEO and the appointment of a successor as inside information and has delayed disclosure of that information.

Whilst the FCA appreciates that issuers are likely to want to manage the disclosure of CEO resignations and appointments of a replacement as smoothly as possible, it is important that issuers have regard to the timely identification and disclosure of inside information concerning both the resignation of the existing CEO and the appointment of a successor. This is particularly the case where the information leaks or there is press speculation during the succession process.

The FCA highlights that issuers will need to carefully and continually assess the point at which developments concerning the succession process constitute inside information - on a case-by-case basis. Separate assessments should be carried out for developments in both the resignation and appointment given these are two separate pieces of information which may on their own constitute inside information at different points in time. It is possible that events during this process could be inside information at an early stage and before the formal resignation of the existing CEO and/or appointment of a replacement. This could include where the CEO has signalled an intention to resign and/or the board has started discussions to appoint a potential successor. The FCA notes that the test of whether the information is precise is most relevant here. The FCA also reminds issuers that an intermediate step in a protracted process should also be deemed to be inside information if, by itself, it satisfied the criteria of inside information.

Other factors issuers could consider when assessing the price sensitivity of the resignation and appointment could include the length of service of the existing CEO and therefore the market's expectation of the retirement, the expectation that a 'natural' successor exists or the reasons behind the CEO's resignation.

If there is continuous press speculation on the succession, the issuer may need to carefully consider whether this constitutes a leak. Technical Note 520.2 may be useful in this context. The FCA stresses that issuers should take particular care to control inside information during the recruitment process especially where an external search consultancy has been appointed.

Additionally, issuers with a listing of shares in the Equity Shares (Commercial Companies) category should also ensure compliance with UKLR 6.4.6R which requires the company to notify a Regulatory Information Service (RIS) of any change to the board, including appointments and resignations of directors, as soon as possible and, in any event, by the end of the business day following the decision or receipt of notice about the change by the company.

Issuer actions

The FCA details certain actions that issuers could consider taking to ensure they are well prepared to correctly identify when information may constitute inside information in the cases above and more widely, including:

• establishing a disclosure committee whose role is to determine and advise when information meets the threshold for inside information and determine the timing and content of announcements. This might include having a clear understanding of the definition of inside information and having access to external counsel, including legal, advisory and corporate brokers at short notice;
• making sure that the CFO, CEO and Company Secretary can make announcements on performance and event-based inside information outside of normal reporting timetables and absent a formal disclosure committee (see Market Watch 58);
• training relevant employees, including those in the finance function, to enable them to recognise when inside information meets the threshold. This could include rehearsing scenarios which may arise, for example, during the preparation of periodic financial information;
• ensuring that information classified as inside information is promptly controlled and managed appropriately, including the timely creation and updating of insider lists; and
• documenting the reasons information was classified as inside information or, where there was consideration and conclusion that it was not, documenting those reasons.

Dissemination of inside information by issuers during shareholder calls and meetings

The FCA notes that whilst communication apps and associated calls provide smaller shareholders with an important opportunity to engage directly with management, they can create risks that confidential, non-public or price-sensitive information is shared during these communications. The FCA has seen these risks crystallise where calls take place in the absence of an issuer publishing any announcements via a RIS relating to its progress and financial performance outside of its six monthly periodic financial reporting obligations under DTR 4.

The FCA refers to Article 10 (Unlawful disclosure of inside information), Article 14 (Prohibition of insider dealing and of unlawful disclosure of inside information) and Article 12(1)(c) (Market manipulation) of MAR, together with relevant caselaw in this context, including the Gent case.

The FCA also notes that, amongst other things: 

• an issuer should be conscious that any comments made by it around the trading of its shares could constitute market manipulation;
• shareholders may perceive statements made by management during the communication to be price sensitive and/or material new information even when they are not; and
• management should be careful to ensure the language used in communications is clear and unambiguous so that it is understood by investors.

Issuer actions

Where issuers do communicate privately with shareholder groups, the FCA sets out certain actions which issuers may consider in order to limit the risk that inside information or misleading statements are disclosed, including the following: 

• issuers could avoid scheduling calls or making communications during closed periods where information involved with the preparation of financial reports could constitute inside information;
• communications could take place shortly after an issuer has published a financial report or update to the market so that management can closely align its messaging with those statements;
• prior to a communication, management should be confident that all inside information concerning the issuer, in particular information concerning the company’s current trading and financial position, has been published and that the issuer is not delaying the disclosure of any inside information. Issuers should consider carrying out their own assessment and may want to take legal advice about whether a piece of information that they wish to discuss on the call is or may be inside information; and
• at the outset of the call, management could reiterate that no inside information will be disclosed during the communication.

FCA intervention

Where the FCA sees untoward share price movements following investor calls, it is likely to make contact in real time with the issuer’s management to understand what was discussed during the call and whether the issuer may have an announcement obligation. The FCA may make further enquiries after the event if it suspects inside information may have been disclosed or discussed during these calls. This could lead to enforcement action. 

Dissemination of regulatory information during interruptions to PIP services

The FCA reminds issuers that they must use a PIP (also referred to as a RIS) whenever they are required to disclose regulated information (i.e. information that is required to be disclosed under Articles 17 – 19 of MAR, the UKLRs and the Disclosure Guidance and Transparency Rules).

The FCA notes that, following the Crowdstrike outage which affected some PIPs in July, it saw some issuers publishing regulated information on their respective websites despite the corresponding regulated information not being released via the PIP as a result of the outage. In this context, the FCA notes PMB 37, in which it referenced the risk that an issuer (or anyone in possession of the information) may disclose the information itself (for example, on its website), on the assumption that it had been disseminated to the market by its PIP. This has the potential to be inadvertent unlawful disclosure. Issuers should not assume their PIP has disseminated the information and should always check the announcement has been successfully made via their PIP before uploading regulated information onto their website. 

Issuer actions

The FCA notes, amongst other things that:

• if issuers are intending to publish regulated information on their website, or via any other media channels, they should do so only once the information has been disseminated via the PIP. Where issuers have submitted a request to a PIP to disseminate regulated information, issuers should confirm that the information has been disseminated via the PIP before disclosing or publishing the information themselves; and
• in PMB 37, the FCA suggested that issuers may want to consider setting up a second PIP account which can be used when the first PIP account service is interrupted. This increases the likelihood that regulated information will be disseminated promptly and in line with the rules, even in an outage scenario. The FCA continues to encourage issuers to consider having alternate PIP accounts to meet their disclosure obligations where their usual PIP is affected by an outage.